Vitalik Buterin Reveals His Basic Theory of Stablecoin Evaluation.
Vitalik Buterin points out Terra’s weakness.
Vitalik classifies LUNA as a volcoin (volatile coin) and points out that the price of LUNA in the Terra ecosystem is determined by the expectation of future activity fees. He claims that if there is no further activity, the coin will plummet to a near-zero value.
- The market cap of the volcoin drops until it becomes quite small relative to the stablecoin. At that point, the system becomes extremely fragile: only a small downward shock to demand for the stablecoin could lead to the targeting mechanism printing lots of volcoins, which causes the volcoin to hyperinflate, at which point the stablecoin too loses its value.
Stablecoins, according to Vitalik, are mostly tethered to the US dollar. Stablecoins, he argued, could be linked to a basket of assets. Such a stablecoin, according to Vitalik, can work without fail if someone can find an oracle to find that index.
He sums up his experiment by saying:
- “For a collateralized automated stablecoin to be sustainable, it has to somehow contain the possibility of implementing a negative interest rate.”
According to Vitalik, a stablecoin like this should be able to respond to a circumstance where demand for holding outweighs demand for borrowing. If it fails, the price, according to him, will rise over the peg, causing price volatility.
- “In general, the crypto space needs to move away from the attitude that it’s okay to achieve safety by relying on endless growth.”
He claims that even if a system passes this simple test, it may still be ineffective for other reasons. However, he emphasizes that the base evaluation criterion should always be the steady-state and severe circumstances.
