All Stablecoins Are Algorithmic Stablecoins

in #luna15 days ago (edited)


The crypto world is still recovering after the recent Luna clusterfuck. Here's the TL/DR, (just in case you didn't live on planet Earth last week): a stablecoin linked to Luna, called UST, lost its peg during the last 4 days, and that generated a "spiral of death", in which both assets crashed.

UST is an algorithmic stablecoin, in the sense that's is not 1:1 backed with another asset. Or, in financial lingo, it's not "collateralized". It is supposed to keep its peg to the USD by a burn and creation mechanism paired to Luna. You could say that the two tokens are linked to each other by an algorithm which makes sure, under normal circumstances, that one of them will always be equal to 1 USD.

It's still unclear what provoked the crash, but it's safe to assume it was an attack. One carried out not with troops and weapons, but with money. An actor, or a group of actors, planned and executed a series of operations which led to a loss of a peg.

I'm not going to go into details about that. There's something else that's important here. Namely: the "out of thin air" claim of all the disappointed people. Even names that I saw keeping their cool during stressful situations caved in this time, and came out with stances like: "of course it's a Ponzi scheme, this token is not baked by anything". Or: "all algo stablecoins are shit, they aren't backed by anything".

This proves, once again, that in very stressful conditions, humans are narrowing their attention span and default to tunnel vision. It's a fundamental survival skill, after all, so it's not surprising.

You see, every stablecoin is an algorithmic stablecoin.

Even fiat ones. The USD used to be "collateralized" with gold. That was USD algorithm: 1 USD equal a certain amount of gold. Alas, this ended in the seventies. There's no collateral for USD now at it hasn't been for half a century. It has been replaced with gibberish like "quantitative easing", which is another way to say its supply is not hard capped. Well, well, Luna supply wasn't capped either.

Even more, USD is less "algorithmic" than UST, because it's literally at the fingertips of politicians. Many of them unelected, bureaucrats which are following the indications of those in power at the current moment. There's literally no "collateralized" algorithm for USD, but...

But make no mistake, "there's no algorithm", "there's no collateral" doesn't mean the currency is not enforced. That's a very different thing and here, UST and USD differ a lot. UST isn't "enforced" by anything other than the free will of holders, which can hold or sell at will. USD is truly enforced by men with guns. By fear. If you think I'm exaggerating try not to pay your mortgage for 6 months. See what's happening.

The perceived value of a stablecoin is an illusion. Even when you add a "hard collateral" to it, some "real life value", if you keep poking at that "real life value", you won't find anything there. It's all a chain of illusions, of collective agreements rooted in the collective hallucination of the concept of "money".

At the end of the day, a stablecoin perceived stability is the result of an algorithm. There are social algorithms (fear, in case of fiat) or mathematical algorithms (crypto). Both these algorithms have shortcomings.

The "fear" algorithm kept the world together for a few hundreds years. It was improved, streamlined, concealed under names like "democracy" and "freedom". But at its core it's still just fear.

We're at a moment in human history when large scale experiments are trying to replace the "fear" algorithm with a mathematical one. We're very, very early and that means these new algorithms are still vastly inefficient. Crashes like Luna will keep happening.

But, essentially, this an exit strategy from the fear algorithm. With the tools that we have now, this is the only way out of the "fear" algorithm.

If, somehow, we get to a point where we can reliably maintain the illusion of currency somewhere in the middle of the spectrum, between the extremes of greed (which pushed Luna to $100, thus becoming a honeypot for other greedy people, ready to hijack the value "locked" there), and fear (which made Luna go below $0.001), then we're out of the woods.

Still quite a lot of time until we get there. That's the bad news.

The good new is that the time flows much faster these days.


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