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# Algorithmic Stablecoins: Now and Future

January 31, 2023 - 7 min read

#### In the volatile crypto market, algorithmic stablecoins offer a novel way to maintain price stability; they should also address pressing problems like resilience to market volatility.

High volatility has long been one of the major barriers to the adoption of crypto assets. This problem is addressed by stabilizing the highly volatile market by fusing the benefits of cryptocurrencies with the price stability people expect of their fiat currencies.

Stablecoins are more transparent compared to other cryptos as they maintain verifiable and auditable reserves of their underlying assets. For investors wishing to participate in the cryptocurrency ecosystem, stablecoins offer a more stable, safe, and easily accessible choice. Stablecoins make it possible to move money swiftly, cheaply, and without incurring the risk of asset price volatility. This can be done at any hour of the day and on weekends since stablecoins often circumvent the need to use banks or other legacy payment systems.

## The Collapse of the UST

Generally, the stablecoin market has been dominated by centralized coins like USD Coin and Tether. In late 2020, Terra launched  UST, an algorithmic stablecoin, to challenge this dominance. UST was launched to sabotage the dominance of centralized stablecoin in the market.

Unfortunately, the initiative suffered a serious setback in May 2022 when the price of TerraUSD outpaced the value of LUNA currency. As a result, while centralized stablecoins have briefly benefited from this failure, algorithmic stablecoins have suffered.

Due to its high yearly return of 19.5% for staking on the Anchor protocol, the UST stablecoin quickly ascended to become the third most capitalized stablecoin on the market. However, the constant upward pressure on UST caused problems as the market started to fall, resulting in LUNA burn. As a result, UST investors sold LUNA to profit from the arbitrage opportunity, further lowering its value.

The UST price falls, and the arbitration process fails due to a concurrently dramatic collapse in the price of LUNA, starting a vicious cycle. The circulating supply of LUNA keeps increasing, accelerating its collapse and preventing the UST from regaining its peg to the dollar despite efforts by the Luna Foundation Guard to spend its reserves and protect itself.

A stablecoin that had once been valued in the billions of dollars failed due to this downward cycle, leaving many investors with nothing. It is hard to break the loop in the case of algorithmic stablecoins because they are only as good as their programming.

## What Does The Future Hold?

Algorithmic stablecoins offer greater transparency by enabling users to view all transactions, making it harder to manipulate the system. Also, algorithmic stablecoins are decentralized and follow the essential tenets of cryptocurrencies, strengthening their resistance to censorship. Decentralization lowers the risk of corruption and the abuse of power, encouraging greater accountability and openness.

However, decentralized stablecoins are frequently stabilized or backed by volatile cryptocurrencies, which presents a substantial difficulty for algorithmic stablecoins. Due to their reliance on unstable cryptocurrencies, algorithmic stablecoins are subject to volatility and unpredictable price changes.

The future of algorithmic stablecoins is still being determined because of these problems. Stablecoins backed by cryptocurrencies behave more like risk coins and are more prone to de-pegging because of their volatility during bear markets. As a result, it is more challenging to evaluate the risk attached to them.

The cryptocurrency community has debated stable algorithmic currencies, especially after the UST crash. Algorithmic stablecoins have a bright future despite voiced worries regarding their stability and susceptibility to unexpected market changes.

Algorithmic stablecoins are a useful option due to their benefits like efficiency and cost-effectiveness. In addition, they do not require a reserve of fiat currency to support the stable coin’s value. After all, the potential of stable algorithmic currencies shouldn’t be overshadowed by their risks.

To level up and gain a deeper knowledge of all things related to the future of the cryptocurrency industry, check out the latest content in the Supra Academy section.

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