Ethereum cofounder Vitalik Buterin says stablecoin turmoil should push investors back to ‘principles-based thinking’ and not rely on endless growth

“Even outside of crazy hypotheticals where you build a stablecoin to track a Ponzi index, the stablecoin must somehow be able to respond to situations where even at a zero interest rate, demand for holding exceeds demand for borrowing,” Buterin wrote. “If you don’t, the price rises above the peg, and the stablecoin becomes vulnerable to price movements in both directions that are quite unpredictable.”

As part of a thought experiment in his blog post, Buterin examined a hypothetical stablecoin tracking an index that promised 20% annual returns.

The remarks come after the crash of Terra earlier this month. The algorithmic stablecoin used code and relied on the minting and burning of a sister-token to maintain a peg to the dollar. But Terra crashed and sent the broader crypto market reeling.

He touted “principles-based thinking” in a blog post entitled “Two Thought Experiments to Evaluate Automates Stablecoins” published Wednesday. Buterin also cautioned that expecting the broader cryptocurrency market to continue to notch limitless growth is detrimental.