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Sam Bankman-Fried, founder and CEO of Bahamas headquartered cryptocurrency exchange, FTX, reflected on the future of stablecoins after the past week’s carnage involving TerraUSD (UST) and Terra (LUNA).
According to Bankman-Fried who took to Twitter, the so-called stablecoins need to have separate and clearly refined definitions as there is too much confusion on the accompanying mechanisms. He said:
“A good point someone brought up recently: really ‘stablecoin’ is used to mean multiple different things.
One thing it can mean is ‘stablecoin backed 1:1 by a US dollar in a US bank account.’
That’s what current drafts of US regulations are looking to license, as a first step.”
‘SBF’ then talks about other stablecoin tiers which are susceptible to volatility and risk because they are backed by a mix of assets and debts, instead of a US dollar reserve:
“Another is ‘stablecoin backed >= 1:1 by liquid debt assets, treasuries, and USD’. Non-zero price risk, but generally they stay very close to $1 because they can be redeemed.
For example [Tether] USDT has stayed within a few % of $1 during this crash, and [I’m] hearing $1b+ successfully redeemed.
A third is ‘stablecoin backed >= 1:1 by a very volatile asset.’
Those are ‘algorithmic’ stablecoins. If the underlying crashes, they can go down. A lot. e.g. UST.”
Going forward, Bankman-Fried believes a solution starts with applying distinct definitions to the different stablecoins:
“Really we shouldn’t use the same word for all of these things. What we call ‘algorithmic stablecoins’ aren’t really stable in the same way that fiat-backed stablecoins are.
They’re more like structured products, and they need upside if they want to justify the risk.
This might not seem as important to people in crypto, because we already know that algorithmic stablecoins are pretty different from fiat-backed ones. But in the policy space, that message often gets lost. We need to be explicit about it.”
On UST and the connected LUNA crisis, the FTX head said the following in response to a question:
“This one might be tough – the real, honest answer is that, probably, either UST or LUNA have to go to 0 (or both).
There’s no way to save both of them. (And it’s not clear as of now that there’s any way to save UST’s peg even if you sacrifice LUNA.)”
At the time of writing, TerraUSD is valued at $0.2188 while LUNA is moving hands at $0.000374 according to CoinMarketCap data.