It’s Time To Call Algorithmic Stablecoins Something Else, Says FTX Crypto Exchange CEO Sam Bankman-Fried

FTX cryptocurrency exchange founder Sam Bankman-Fried weighs in on the future of stablecoins after two top cryptos suffered staggering losses this week.

Bankman-Fried recently tweeted on how so-called stablecoins should have distinct and more refined definitions following Luna Foundation Guard’s TerraUSD (UST) loss of its peg to the US dollar (USD) and the fall of Terra (LUNA ).

“A good point someone brought up recently: really ‘stablecoin’ is used to mean several different things.

One thing it can mean is “stablecoin backed 1:1 by US dollar in US bank account”.

This is what the current draft US regulations seek to allow, as a first step.

The FTX CEO went on to mention other levels of stablecoins that are sensitive to volatility and risk because they are not strictly backed by dollar reserves, but by a mix of assets and liabilities.

“Another is “stablecoin backed >= 1:1 by liquid debt assets, treasury bills and US dollars.” Non-zero price risk, but usually they stay very close to $1 because they can be redeemed.

For example [Tether] USDT remained within a few % of $1 during this crash, and [I’m] hear $1 billion+ successfully redeemed.

A third is “stablecoin backed >=1:1 by a highly volatile asset.”

These are “algorithmic” stablecoins. If the underlying goes down, it may go down. A lot. ex. UST. »

When it comes to solutions, Bankman-Fried suggests apply separate definitions to different versions of what currently falls under the broader stablecoin terminology.

“Really, we shouldn’t use the same word for all these things. What we call “algorithmic stablecoins” are not really stable in the same way as fiat-backed stablecoins.

They are more like structured products, and they need more edge if they are to justify the risk.

This may not seem as important to crypto users, as we already know that algorithmic stablecoins are quite different from fiat-backed ones. But in the political space, this message often gets lost. We need to be explicit about this.

In response to a question asking if FTX could come to the aid of LUNA in light of Bankman-Fried gaining access to the admin keys of the decentralized exchange (DEX) SushiSwap (SUSHI) in September 2020, the CEO said it’s unlikely.

“This one might be tricky – the real honest answer is that probably either UST or LUNA should go to 0 (or both).

There’s no way to save them both. (And it’s not clear at this time that there is a way to save the UST ankle even if you sacrifice LUNA.)”

At the time of writing, TerraUSD is down 41.7% and is currently valued at $0.49.

Meanwhile, Terra imploded from over $80 a week ago to $1 on May 11. LUNA is down 99.03% on the day and priced at $0.006645 at the time of writing.

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