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.
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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 !
Timely professional and straightforward. Do is evolving into quite the leader.
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How safe is Anchor? Can this happen to it as well like Iron?
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Look at the history. Maintained 18% APY even during the crash.
Doesn't mean you can't get liquidated if you borrow against your luna tho.
Although, you can Harpoon others pain points. :)
Fun times.
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Hi, please find the unroll here: 1/ My thoughts on and building new algo stablecoins 🧵 2/… threadreaderapp.com/thread/1405742 Enjoy :) 🤖
That is why solution from will be worth it, as it has figured out a means to build a stable coin that mitigate the risk associated with all three version of stable coin out there
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This is how it’s done. There’s an irony in the fact that the iron docs explicitly outline UST and its ‘failure to regain peg quickly led to a bank run’ in its ‘iron peg analysis section’.
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