Algorithmic Stablecoin Resiliency More Important Than Growth: Vitalik Buterin

Key Takeaways

• Vitalik Buterin defended the concept of algorithmic stablecoins in a blog post today.
• According to Buterin, algorithmic stablecoins should seek resiliency over quick growth.
• His comments come three weeks after the Terra collapse.

Share this article

URL Copied

Vitalik Buterin has shared his thoughts on algorithmic stablecoins in a blog post, arguing that protocols should strive for resiliency above all else.

Withstanding Extreme Market Conditions

Ethereum creator and co-founder Vitalik Buterin took to his blog today to address the criticism algorithmic stablecoins have faced since the collapse of Terra’s UST stablecoin.

While he welcomed the “greater level of scrutiny on DeFi financial mechanisms” that Terra’s meltdown had brought, he pushed back on the idea that automated stablecoins were flawed by design.

Pointing to protocols such as MakerDAO’s DAI and Reflexer’s RAI, both of which have survived extreme market conditions as successful automated stablecoins, Buterin offered two thought experiments to help judge the resiliency of a stablecoin. 

The first was to calculate whether the “stablecoin [could], even in theory, safely ‘wind down’ to zero users” without collapsing the way Terra had and hurting users. He argued that RAI offered such a system, explaining that RAI’s last holder would still get a fair price for their coins even if all other demand for the token suddenly evaporated.

The second thought experiment would be to evaluate whether the stablecoin’s protocol contained the “possibility of implementing a negative interest rate.” In other words, the algorithm should be capable of canceling out the potential growth rate of whichever index the stablecoin is pegged to. Buterin suggested this was a critical factor that, over time, makes the difference between a reliable protocol and a Ponzi.

Buterin’s remarks come three weeks after Terra’s UST token dramatically lost its $1 peg, sending its LUNA token from $77 to $0.00014, endangering the Terra blockchain, and wiping out more than $42 billion from the crypto market.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

Share this article

URL Copied

Recommended News

Vitalik Buterin Skeptical of Cross-Chain Bridges

People

Jan. 8, 2022

Ethereum co-founder and developer Vitalik Buterin tweeted a link to a Reddit post today in which he discussed his belief in a multi-chain future, but expressed doubt concerning cross-chain ecosystems….

Vitalik Buterin Discusses Benefits of Non-Transferable NFTs

People

Jan. 26, 2022

Ethereum co-founder Vitalik Buterin has published an opinion piece on non-transferable NFTs, arguing that there are some use cases in which token transferability is counterproductive. True Non-Fungibility Vitalik Buterin thinks…

Vitalik Buterin Quietly Donates $5M in Ethereum to Ukraine

News

Apr. 7, 2022

Ethereum creator and co-founder Vitalik Buterin has donated $5 million to Ukrainian charities, according to recent reports. Buterin Donated to Two Charities Vitalik Buterin donated $5 million worth of cryptocurrency…