His post focused on Reflexer’s RAI stablecoin, fully collateralized with Ether (ETH), in particular, which is not tied to the value of fiat currency and relies on algorithms to automatically set an interest rate, proportionally opposing moves. pricing and incentivizing users to return RAI at their target price range.
Buterin claimed that it “exemplifies the pure ‘ideal type’ of a collateralized automated stablecoin,” and its structure also gives users the opportunity to mine their liquidity in ETH if faith in the stablecoin falls significantly apart.. The Ethereum co-founder offered two thought experiments to determine if an algorithmic stablecoin is “truly stable.”
“While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to eventually collapse, and many more that can theoretically survive but are highly risky, there are also plenty of stablecoins that are highly robust in theory, and have survived testing. extremes of cryptocurrency market conditions in practice,” the expert said.
1: Can the stablecoin “shrink” to zero users?
In Buterin’s opinion, if the market activity for a stablecoin project “falls to near zero”, users should be able to extract the fair value of their liquidity from the asset. Buterin highlighted that UST does not meet this parameter due to its structure in which LUNA, or what he calls a volcoin, needs to maintain its price and user demand to maintain its peg to the US dollar. If the opposite happens, then it is almost impossible to avoid a collapse of both assets.
2. Negative interest rate option
Buterin also sees it as vital that an algorithmic stablecoin be able to implement a negative interest rate when it is following “a basket of assets, a consumer price index, or some arbitrarily complex formula” that grows 20% a year.
“Obviously, There is no genuine investment that can come close to a 20% return per year, and there is definitely no genuine investment that can keep increasing your rate of return by 4% per year forever. But what if you try?said.
He stated that there are only two outcomes in this case, either the project “charges holders some sort of negative interest rate that balances out to basically cancel out the dollar-denominated growth rate built into the index.” Either “it becomes a scam, giving stablecoin holders incredible returns for some time until one day it suddenly collapses with a bang.”
Buterin concluded by pointing out that just because an algorithmic stablecoin is capable of handling the above scenarios, it does not make it secure: “It could remain fragile for other reasons (for example, insufficient collateral ratios), or have governance flaws or vulnerabilities. But steady state and extreme case robustness should always be one of the first things we check.”
It is worth noting that the co-founder of Ethereum was no stranger to the dramatic collapse of cryptocurrencies that peaked two weeks ago after the collapse of Terra USD (UST) and Terra (LUNA) assets. In fact, days ago he wrote on his Twitter account that as a result of what happened he was no longer a “billionaire.” Although the market is slowly recovering, many investments have already been lost.
Source: Ambito
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