In a blog post, Vitalik Buterin discussed algorithmic stablecoins, stating that protocols should prioritise durability over everything else.
Vitalik Buterin, the creator and co-founder of Ethereum, took to his blog today to address the criticism levelled at algorithmic stablecoins following the failure of Terra’s UST stablecoin.
While he welcomed the “increased degree of scrutiny on DeFi financial processes” brought forth by Terra’s meltdown, he argued that automated stablecoins were flawed by design.
Buterin proposed two thought experiments to assist in measuring the resiliency of a stablecoin, citing protocols like MakerDAO’s DAI and Reflexer’s RAI, both of which have sustained harsh market circumstances as effective automated stablecoins.
The first was to determine if the “stablecoin [could], even in theory, securely ‘wind down’ to zero users” without failing and hurting users like Terra did. He contended that RAI provided such a system, arguing that even if all other demand for the token suddenly vanished, RAI’s last holder would still receive a fair price for their coins.
The second thought experiment would be to see if the stablecoin protocol allowed for the “implementation of a negative interest rate.” In other words, the algorithm should be able to balance out the prospective growth rate of the index to which the stablecoin is linked. Buterin noted that this is a fundamental aspect that, over time, distinguishes a dependable protocol from a Ponzi scheme.