Vitalik Buterin proposed ways to maintain the viability of algorithmic stablecoins – Bits Media

Ethereum co-founder Vitalik Buterin proposed two options for maintaining the viability of algorithmic stablecoins, which will allow them to avoid failure, what happened with Terra.

After the sensational collapse of the Terra project, stablecoin UST and coin LUNA, which led to multi-billion dollar user losses, Buterin expressed hope, that now users will begin to be more scrupulous when choosing cryptocurrency projects for investment. There are many algorithmic stablecoins, which are fundamentally flawed and doomed to failure. but, there are others, which theoretically can “stand”, but still very risky. Despite the current situation, It makes no sense to completely abandon algorithmic stablecoins, writes Buterin.

Buterin named the RAI crypto asset as an “ideal example” of an automated stablecoin, backed by ether. It is not tied to the value of fiat currency and relies only on algorithms, automatically setting the interest rate for proportional price movements. Buterin said, that even if user confidence in the stablecoin weakens, they will be able to extract liquidity into ether. Если стоимость стейблкоина упадет почти до нуля, users must be able to extract liquidity from the asset.

Buterin emphasized, that UST does not meet this parameter due to its structure, in which LUNA, which he called a "voluminous coin" (volcoin), must maintain its rate and user demand to maintain the peg to the US dollar. Otherwise, it will be almost impossible to avoid the collapse of both crypto assets.

"Firstly, the rate of such volcoin is falling, then starts “shake” and stablecoin. The system is trying to support demand for stablecoin, releasing more “volume coins”. When trust in the system is low, there are few buyers, that's why the volcoin rate is rapidly falling. As soon as it approaches zero, stablecoin is also collapsing", – writes Buterin.

Considering, that RAI is supported by ether, loss of trust in stablecoin will not affect ETH much, which will reduce the likelihood of a large-scale collapse. At the same time, users will still be able to exchange RAI for ETH, located in storage, which support the stablecoin and its credit mechanism.

Buterin also considers it critically important, so that algorithmic stablecoins can implement negative interest rates, when tracking a “basket of assets”, consumer price index or some complex formula", which would grow by 20% in year. Buterin believes, that in this case, users should be charged a negative interest rate to balance, to neutralize growth rates when pegged to the US dollar, built into the index. Otherwise, the project will bring big profits only for some time, until at one moment it “collapses with a roar.”

In conclusion, Buterin noted, что даже реализация вышеописанных сценариев не сделает алгоритмические стейблкоины полностью безопасными. Следует учитывать и другие факторы, eg, ошибки или уязвимости в управлении.

In January, Vitalik Buterin proposed a new concept of non-fungible tokens (NFT), which will be impossible to transfer or sell. He described the concept as "soulbound", which means it is impossible to identify an NFT with its original owner.