World Economic Forum Participant Predicts End of Algorithmic Stable Coins

Following the highly publicized collapse of TerraUSD (UST) and several other algorithmic stablecoins, crypto investors have been forced to collectively rethink what “stable” actually means. According to some industry experts, this writing could be on the wall for this particular asset class, although “legit” asset-backed stablecoins such as Attached should do well. Count Reeve Collins, co-founder of the digital token company BLOCvamong those who believe that algorithmic stablecoins are not coming back.

Speaking to the World Economic Forum, Mr. Collins did not hold back his view that faith in algorithmic stablecoins has dissipated, perhaps forever. In an interview with CNBC in Davos last week, he said:

It’s a shame that the money…was lost, however, that’s no surprise. It is an algorithm-based stablecoin. So it’s just a bunch of smart people trying to figure out how to peg something to the dollar. And a lot of people have withdrawn their money over the past few months, because they realized it wasn’t viable. So this crash had a cascading effect. And that will probably be the end of most stablecoin algorithms.

Reeve Collins, co-founder of the digital token company BLOCv

Keep in mind that Mr. Collins may not be an impartial actor when it comes to his comments. He is also the co-founder of Tether, which is a popular stablecoin backed by cash, US Treasuries, and corporate bonds to help it maintain peg at US$1. Asset-backed stablecoins and algorithmic stablecoins are largely competitors and compete for a similar pool of investment capital in the crypto space. Clearly, the latter’s collapse has boosted the prestige and viability of the former’s investments in recent weeks.

Although the carnage of the industry has been mostly relegated to algorithmic stablecoins, Tether has not been immune to volatility. On May 12, tether briefly lost the US$1 peg, trading as low as 0.9815 as the wave of blind risk reduction swept through the market. The move was short-lived, however, and Tether quickly bounced back towards the US$1 peg, which it has held faithfully since January 2020.

Source: Coindesk – Full historical price history of stablecoin tether price

Whether algorithmic stablecoins are disappearing as an asset class is unclear. Although many experts predict its demise, some believe these assets will regain confidence over time.

Jeremy Allaire, CEO of Circle, one of the companies behind the issuance of the USDC stablecoin, believes that people will continue to work on algorithmic stablecoins, stating, “I have compared algorithmic stablecoins to the fountain of youth or the holy grail. Others have called it financial alchemy. And so there will continue to be financial alchemists who, who are working on the magic potion to create these things, and to find… the holy grail of stable value, an algorithmic digital currency. So I fully expect to continue that,”

Although opinions are divided on the future of algorithmic stablecoins, there is no doubt that more control and regulation are on the horizon. The road to renewed investor confidence, if fully restored, will be long and arduous.

Melvin B. Baillie