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History of failed stablecoin

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Read 3 minutes by Ryan S. Gladwin

The idea behind Stablecoin is that unlike other forms of cryptocurrencies where prices often fluctuate significantly, Stablecoin is fixed to a more robust asset, usually the US dollar. It is designed to offer the advantage of paying in cryptocurrencies without volatile price fluctuations. Or at least the way it’s supposed to work.

Problems arise when the price deviates significantly from the peg. Investors panic, run a run, and coins fall into a “death spiral.” This is what happened at Terra USD (UST).

There are three main types of stablecoin. Flatback (maintains the equivalent reserve of the currency in which the token is pegged). Encrypted (tokens are secured by cryptocurrencies); and algorithms (tokens rely on algorithms to regulate supply and demand to fix the price at $ 1).

UST is a blend of cryptocurrencies and algorithms (not all algorithm stablecoins are backed by assets). Historically, most of the stablecoins we saw were unsuccessful and algorithmic.

Not stablecoin

The most notorious example of a failed stablecoin was the Basis Cash, which went on sale in late 2020 and quickly burned. The market capitalization of Basis Cash at its peak was $ 30.74 million. Basis Cash struggled to maintain its pegs, dropping from $ 1 to $ 0.30 in January 2021.

In this project, we used what is called the “Seigniorage algorithm”. This system creates two (or more) tokens. One is Stablecoin and the other is a token that can be moved freely like any other token. When the price of Stablecoin drops below $ 1, the owner of the second token will be able to buy Stablecoin at a discounted price. This will bring the price back to $ 1. If it exceeds $ 1, more stablecoins will be created, distributed throughout the network and the price will be pushed down to the pegs.

This is a system similar to that used by Terraform Labs for LUNA and UST tokens. (CoinDesk recently reported that Terraform Labs founder Do Kwon was one of the founders of Basis Cash’s pseudonym.)

Another big seigniorage algorithm stablecoin that failed was EmptySetDollar. It was also launched in late 2020 and peaked at $ 22.74 million in market capitalization. Within a few months, the token lost its peg to the US dollar and began to fall below $ 0.01.

Then, in June 2021, Stablecoin of Iron Finance died, and the holdings of investors including Mark Cuban were wiped out. Mark Cuban immediately called for space regulation. The stablecoin used a partially encrypted seigniorage algorithm, similar to the system Terra adopted in UST. When Iron’s TITAN tokens were overvalued, many large investors were put up for sale, Stablecoin fell from the US dollar, and-as you can imagine-another death spiral occurred.

These are the biggest stablecoins that fail, but many other coins have fallen before they do a lot of damage. Other stablecoin projects that have been depegated and have not recovered include SafeCoin, BitUSD, DigitalDollar, NuBits, and CKUSD.

Can UST come back?

Things look very dark to Terra. There was at least one stablecoin to recover from the death spiral, but the situation was different.

Stablecoin OUSD was hacked in November 2020 and the price plummeted to $ 0.14. The price hasn’t moved for months, and investors have sweated. It successfully rebooted in January 2021 and approached a $ 1 peg, raising its market capitalization from less than $ 1 million before hacking to just over $ 60 million.

In any case, the collapse of Terra and the subsequent crash of cryptocurrencies have led to calls for more regulation in the industry. It also raised new concerns about Tether, the largest stablecoin that temporarily lost its peg to the US dollar following the collapse of UST. Tether claims to be a flat-lined stablecoin with cash or “cash equivalent” backing. However, Tether had previously been fined by the US government for misrepresenting the reserve, and has since failed to be as transparent as many would have hoped for.

Following the fall of UST, US Treasury Secretary Janet Yellen said she hopes Congress can pass a bill to create a regulatory framework for Stablecoin later this year.

Sources

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2/ https://www.fastcompany.com/90751716/panics-and-death-spirals-a-history-of-failed-stablecoins

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