TerraUSD Crash will Probably be the End of Most algorithmic Stablecoins

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Stablecoins are cryptocurrency usually pegged to real-world assets, and were supposed to be pegged to the U.S. dollar. Whereas stablecoins like tether (USDT) coins are backed by real world assets like fiat currencies and government bonds in order to maintain their dollar peg, USD is governed by an algorithm. 

The terraUSD stablecoin collapse has shocked the crypto market and is unlikely to survive further. The Co-founder and CEO of digital currency tether had told CNBC recently. The UST’s loss in its dollar peg has led its sister token luna to crash completely to $0. 

Governments around the World are now focusing on regulating stablecoin, the U.S Senate Banking Committee Ranking Member Pat Toomey earlier this year had released a draft set of rules on stablecoin.

In addition, the U.K government had also planned to bring stablecoin under its regulatory preview. The British government further released a proposal to update the existing rules to manage the failure of stablecoin. 

Brertrand Perez, the CEO of the Web 3 Foundation and a former director of the facebook-backed Diem stablecoin project says that once we have a clear regulatory framework on stablecoins the basic rules of the regulation would be that the stablecoin must be backed with a set of strong assets, and those must be audited regularly to keep track of them, Perez says.

Reeve Collins, the co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland, last week that :

“It’s unfortunate that the money was lost, however, it’s not a surprise. It’s an algorithmic-backed, stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar.”

He further added that: “And a lot of people pulled out their money in the last few months, because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most stable stablecoins.” 

The CEO of circle, Jeremy Allaire, one of the companies behind the issuance of the USDC stablecoin says people will continue to work on stablecoin still. He further told CNBC that

“I have compared algorithmic stablecoins to the Fountain of youth or the Holy Grail. Others have referred to it as financial alchemy. And so there will continue to be financial alchemists who work on the magic potion to create these things, and to find the Holy Grail of a stable value, algorithmic digital currency. So I fully expect continued pursuit of that,” 

Adding to this Allaire said that: “Now, what happens with regulation around it is a different question. Are there going to be, you know, clear lines drawn about what can interact with the market. What can interact with the financial system, given the risks that are embedded.”