Decentralized Finance and Stablecoins Will Work in Time

Decentralized Finance and Stablecoins Will Work in Time

After the spectacular implosion of Terra Luna and the UST stable coin, we can be assured that regulators are salivating at the opportunity to point to UST as another dangerous crypto innovation that failed spectacularly and endangered retail investors. I personally never bought into the ecosystem and made my reservations against their structure well known to any investor who sought my advice. However, it is impossible to convince someone who is profiting heavily to change their behavior.

Janet Yellen wasted no time in bringing up UST in her senate hearing on financial risks.

Senator Pat Toomey suggested that experimentation should be allowed and “failure should be an option”, a view I personally agree with. However, it is important to understand that not all stable coins are created equal. 

Algorithmic Stablecoins have been attempted many times and each have failed. They are poorly branded – in a digital landscape where everything is data driven there is nothing other than algorithms. We should be certain to clarify that under-collateralized stable coins are an inherently flawed design. One that will fail without significant intervention. Over collateralized stable coins such as DAI of the MakerDAO ecosystem or USDC are safe to use. Moreover, have stood the test of time. 

There is a large distinction here and one that I strongly suspect regulators not interested in nuance will conveniently ignore. Stablecoins backed by a secondary token within their own ecosystem WILL FAIL!

There are too many variables and it is nearly impossible to codify for all of the edge cases that the system needs to consider in its game theoretic structure.

We have seen similar analogue systems fail with emerging market currencies as well. And, as such, we cannot reasonably assume that these are innovative.

Stablecoins backed by external collateral and minted at a fraction of that collateral value are an elegant design and have a proven track record of success through various market stress tests.

Looking beyond stable coins, I hope the death of Luna marks the death of the ponzinomics of DeFi2.0. Staking and liquidity management are very interesting areas of research and development. But offering high yield platforms paying in native currency is not and cannot be the basis of a new, durable and autonomous financial system.

In conclusion, investors were not duped either, they conveniently ignored the risks and suggested such protocols were risk free. Web3, Web2, fiat, digital, or analogue, we as investors and consumers need to understand that if something is being handed out for free there will always be a risk to stability and there will never be a free lunch for long. We shouldn’t promote such activities as innovative, they are at best well meaning but flawed and, at worst, fraudulent.

Written by Osho Jha

  Co-Founder & Chief Data Scientist at Arbol Inc., Founding Partner at dClimate

Back To News

Decentralized Finance and Stablecoins Will Work in Time

Related News: Arbol Sees Tremendous Growth