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2/ First, I am only writing this post due to high demand for commentary from the Terra community.
I've staked everything on the success of algo stablecoins, and have no intention of capitalizing on others' failures.
We're all in this together - once again, reach out for help.
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3/ For those of you not familar, Iron / Titan has had a rough week - the Iron stablecoin became an overnight success with soaring TVL, driven largely by DeFi traders on polygon and celebrity endorsements.
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4/ Just as quickly, when a critical mass of capital left the system, everything came crashing down - with both the price of the stablecoin and the TITAN reserve asset quickly converging to 0.
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5/ Titan's fate is not far off from that of its many predecessors in ESD, DSD, AMPL, BAC - all of which are trading at ~70-90% off the peg.
So why have they failed? Is algorithmic stability too hard?
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6/ New algo stablecoins have all failed because they solely rely on recursive holding incentives for growth. That is:
If you hold the stablecoin, we will let you farm more stablecoins.
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7/ This leads to a feedback loop where capital flight compresses both the value of stablecoins and the holding yield, increasing both principal risk and lowering returns to compensate.
Death spiral.
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8/ New algo stablecoin developers need to remember that their challenge is economy building > mech design.
The only way to stability sustainable use cases around the stablecoins, and stability will increase as these use cases become more sticky, distributed and uncorrelated.
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9/ There are no recursive holding incentives in Terra - users hold stablecoin to be able to use them across its many applications across payments, investing in synthetic assets, etc.
Replying to
10/ Many of Terra's use cases are countercyclical - E.g. Chai and memepay combined has more than 2.5 million users, all of whom cannot give a shit about DeFi / crypto sentiment.
They just care about what's useful.
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11/ Analogously, the monetary policies governing the USD and the Zimbabwean dollar (on broad brushstrokes) are the same.
The USD is powerful not because of its central bankers, but because of its global reach and utility.
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12/ So why build algo stablecoins at all?
I believe that if DeFi continues to build itself on centralized stablecoins, all of DeFi can be held hostage by those regulating the issuers.
"give me control of a nation's money supply, and I care not who makes its laws.”
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13/ Building decentralized, unbiased stablecoins is one of the greatest challenges of our industry, and I support all the founders joining this good fight.
Good luck !
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