US ban on algos necessary safety feature

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Marius Ciubotariu, co-founder of Hubble Protocol says:

“This kind of legislation should produce a net positive for stablecoins in the long run. Stablecoins are a major piece of developing technology for more than just crypto enthusiasts, and it’s become well-established that algorithmic models are not sustainable for long-term growth or adoption. Very few members of the crypto or decentralized finance community will argue against this position.

Over the last decade of stablecoin development, around two dozen projects that have tackled creating a digital asset that follows the US dollar have failed, and the vast majority of these projects followed an algorithmic model. Terra’s LUNA and UST tokens evaporating in value are the latest examples of this flawed design.

Banning algorithmic stablecoins ought to be a good thing for moving stablecoin development towards greater adoption, and we can look at these regulations in the same favorable light as laws demanding car manufacturers to provide seatbelts as a standard feature. Hopefully, Congress will continue to make informed decisions about the future regulation of stablecoins, and by recognizing the instability of algorithmic stablecoins before moving forward with other regulations, it appears that they are moving in the right direction.

Encouraging the development of sustainable stablecoin designs is a competitive edge for the future of the USD as the world’s de facto reserve currency. Additionally, the news about China’s state control of their CBDC and the implications of choosing the CBDC route seems to fly in the face of free markets operating in democratic societies, so the development of stablecoins is incredibly important at this juncture in history. Whatever form digital assets begin taking on payment rails worldwide needs to be a permissionless tech just like cash is permissionless, or else it’s a credit system, not the future of money.”

Background on algorithmic stablecoins 

“There are essentially three ways to develop a stablecoin for the market: backed by fiat, backed by other crypto assets, or seigniorage (i.e., a purely algorithmic design based on burning and minting a stable/volatile pair, as with UST/Terra). The first two designs can be unwound safely in that fiat stablecoins can be traded back for dollars, and crypto-backed stablecoins can be traded back for crypto assets like bitcoin, but the seignorage style stablecoin has no real intrinsic value backing its existence.

Seignorage tokens attract a lot of speculators, because they rely on two tokens to facilitate price stability for the stablecoin in this duo, and the non-stable token can accrue lots of value as it is burned to create more of its partner stablecoin. This endogenous system, which the draft bill singles out in its scope, is highly fragile and depends on continuous growth to avoid a bank run or death spiral, which is nearly impossible when markets become volatile.

During the LUNA/UST death spiral, the billions of dollars in bitcoin that the Luna Foundation purchased to bolster UST’s peg were impotent in stopping the de-pegging event that was set in motion and propelled by UST’s own design. As more users exited positions in LUNA and UST at the same time, Terra’s LUNA and UST minting and burning mechanisms drove both of these tokens’ prices to nearly zero, so purchasing UST from the market with BTC only helped drag down BTC’s price while having little effect on saving UST.”

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