Does the fall of algorithmic stemcoin kill Defi?

Does the fall of algorithmic stemcoin kill Defi?

In seven days, $ 17 trillion has flowed from various stable coins in circulation. It is a shame for a tool that should guarantee the stability of the ecosystem and promote its development, reassuring investors.

The tool most often used by investors in the cryptocurrency world is in a very bad state: stablecoins are in free fall … while the reason for their existence is precisely to provide some stability in the universe, which is so lacking. Because, by definition, a stablecoin is a type of cryptocurrency that is maintained at a relatively fixed price, often at $ 1. Enough to allow investors to position themselves on various financial instruments offered by so-called decentralized finance, or simply DeFi. But at least not all stablecoins have kept that promise. Their price has been falling since May 5: in 7 days USDN lost 23.5% of its value and UST 55.6%. While stablecoin users used to be confident in their ability to stay stable, distrust is now on the agenda.

Before understanding the reasons for this decline, it is necessary to distinguish between two types of stablecoins: traditional stablecoins, the value of which is based on indexation to currency or real assets, and algorithmic stablecoins. The stability of the latter is supposed to be guaranteed by a combination of algorithm and smart contracts that control the number of tokens in circulation, created or destroyed to maintain parity with the dollar.

Generalized distrust

However, it is likely that after the attack, the UST stablecoin completely lost parity with the dollar. That undermines investors’ confidence in the ability of algorithmic stablecoins to stabilize the market and encourage them to unload their assets en masse. In the market of “stable coins” for a week flew 17 trillion dollars, distrust spread to all stablecoins.

How can an attack on the UST do such damage? The fact is that the UST is not just any stablecoin. In early May, it was the most capitalized of algorithmic stablecoins. After the defeat of investors, UST lost 11,980 billion in capital in four days. In just 24 hours, the total blocked value (TVL) of Terra, a UST-linked blockchain, has fallen by 77%. And in addition to weakening its entire ecosystem, the fall of the UST has a negative impact on the protocols that use it. Thus, Convex Finance lost 47% of its TVL, and Frax – 26%. Despite the efforts of the Luna Foundation Guard, which is responsible for the stability of the Terra ecosystem, investors have doubts about the ability of the SSC to restore parity with the dollar.

“We need a global approach to cryptocurrency regulation.”

Faced with widespread instability in the cryptocurrency market, concerns are gripping institutions. On May 10, Janet Yellen, secretary general of the Treasury and former head of the US Federal Reserve, said the UST case was “a perfect example of what a typical product is.” (stablecoins, editor’s note) rapidly evolving and growing risks to financial stability. And we need a framework (normative, editor’s note) EU Commissioner Myrea McGuinness agrees with US leaders tweets on May 2 “Cryptocurrencies are in full swing. We need a global approach to cryptocurrency regulation to ensure financial innovation and effective consumer protection.” Defenders of cryptocurrencies will be able to answer him that world finances, although regulated, will not skimp on failures …