Even fully-collateralized fiat stablecoins have depegged. Even some of the weak algo stablecoins have recovered.
Some thoughts. 🧵👇
Some thoughts. 🧵👇
I have always said that algo stables are subject to destabilizing bank runs. The only mechanism that can defend against this is a strong, active team that performs open market operations.
My thoughts and takeaways today:
1. We need a decentralized stablecoin. Fiat-backed stables are subject to legal seizure and capture. A decentralized economy needs a decentralized stablecoin whose backing store cannot be frozen or confiscated.
1. We need a decentralized stablecoin. Fiat-backed stables are subject to legal seizure and capture. A decentralized economy needs a decentralized stablecoin whose backing store cannot be frozen or confiscated.
2. There isn't room in the market for a dozen, or half a dozen, or even just two algorithmic stablecoins. This is a market where the biggest one wins and all others lose.
3. If there'll be a decentralized stablecoin that succeeds, it'll be the one with the biggest value and the most battle-tested team.
Let that sink in. It's not a game where johnny-come-lately has a chance.
Let that sink in. It's not a game where johnny-come-lately has a chance.
4. Hope you all can see why you should not touch copycat algo stables issued by purely technical teams. If the team's claim to fame is that they were once interns are Google, they are NGMI. The team that has the best open market operations is the only one that can pull it off.
5. For various regulatory reasons, there's no way a US-based team can succeed at an algo stable. Pretty much only a Korean, Singaporean or Swiss team has the right regulatory environment. All others are ticking time bombs.
6. For the algorithmic side of the stablecoin to work, the underlying chain has to offer high capacity and resilience under load. Few chains have the right mempool, fee and API infra to handle high loads.
7. The space is incredibly resilient. We just weathered a substantial bank run. Had this happened in TradFi, there would have been talk of doom and bailouts galore. One thing we know though, the bankers' bonuses would still be paid.
8. I'm not the least bit surprised by UST's resilience. Remember that every single stablecoin has, at times, depegged, including fully-collateralized fiat-backed stablecoins. All of them that have a real team behind them have bounced back.
9. The bounce back is a great arbitrage opportunity. The dynamic that gives rise to a bank run executes in reverse on the way back.
10. More complex stablecoin designs seem unlikely to be more stable under a bank run. The simpler the mechanism, the easier it is to understand and implement. I can imagine many more complex designs, I can't imagine that any of them would achieve better stability.
12. Every single sovereign currency has also had difficulty maintaining advertised pegs. There isn't much difference between sovereign fiat currencies and algo stablecoins in terms of the challenges faced when defending a peg.
13. Before anyone says "hey, open market operations by a team doesn't seem decentralized," remember that the value proposition here is to create an asset whose backing store is decentralized and can't be confiscated or frozen. A capable team is absolutely essential for this.
14. We all love drama, and it's possible to trade into the drama to eke out small percentage gains while taking on some risks that are hard to anticipate, like CEXes halting trades or deposits or what not. The real fortunes in crypto lie in more straightforward long trades.
Overall, the UST depegging played out exactly as we saw in past historical cases. I'm even more bearish on all copycats, and bullish on UST once the dust settles down.
Loading suggestions...