Luna, the sister cryptocurrency of the controversial TerraUSD stablecoin, has fallen to $0. The collapse of the TerraUSD algorithmic stablecoin has raised questions about the future survival of similar crypto assets.
Dan Kitwood | News Getty Images | Getty Images
Algorithmic stablecoins like terraUSD, which crashed and shocked the cryptocurrency market, have little chance of surviving, the co-founder of the digital currency peg told CNBC.
Stablecoins are a type of cryptocurrency that is usually pegged to a real asset. TerraUSD or UST is an algorithmic stablecoin that was meant to be pegged to the US dollar.
While stablecoins like Tether and USD Coin are backed by real assets like fiat currencies and government bonds to maintain their dollar peg, UST is driven by algorithms.
UST lost its peg to the dollar and this also led to a sell-off of its sister token, Luna, which fell to $0.
The fiasco led to warnings that algorithmic stablecoins may not have a future.
“It’s a pity that the money … disappeared, however, this is not surprising. It is an algorithm based stablecoin. So it’s just a group of smart people trying to figure out how to peg something to the dollar,” Reeve Collins, co-founder of digital token company BLOCKv, told CNBC at the World Economic Forum in Davos, Switzerland, last week.
“And a lot of people have withdrawn their money over the last few months because they realized it wasn’t viable. So this accident had a cascading effect. And this will probably be the end of most stablecoin algorithms.
Collins is also the co-founder of Tether, which is a non-algorithmic stablecoin. But the Tether issuer says it is backed by cash, US Treasuries and corporate bonds. In the turmoil in the cryptocurrency market last month, Tether also briefly lost its peg to the dollar before regaining it.
Jeremy Aller, CEO of Circle, one of the companies that launched the USDC stablecoin, said he thinks people will continue to work on algorithmic stablecoins.
“I compared algorithmic stablecoins to the Fountain of Youth or the Holy Grail. Others call it financial alchemy. And so there will always be financial alchemists working on a magic potion to create these things and find… the holy grail of stable value, an algorithmic digital currency. So I fully expect to continue with that,” Aller told CNBC last week.
“Now what happens to the rules around that is another matter. Will there be, you know, clear lines of what can interact with the market. What can interact with … the financial system, given the risks inherent in it, ”he added.
The crypto industry is expecting tighter regulation of stablecoins, especially after the collapse of terraUSD. Bertrand Perez, CEO of the Web3 Foundation and former director of the Facebook-backed Diem stablecoin project, expects regulators to require these cryptocurrencies to be backed by real assets.
“So I expect that once we have clear regulation of stablecoins, the main rules of regulation will be that you will have a clear reserve with a solid set of assets, that you will be subject to regular reviews of these reserves,” Perez said in an interview with CNBC. . a week.
“So you can have an audit firm that comes in regularly to make sure you have the proper reserves, that you also have the proper processes and measures in place to deal with bank runs and other, say negative market conditions, to make Make sure your stash is really safe, not just when things are going well. ”
Follow CNBC International on this Facebook page.