It’s time to call algorithmic stablecoins something else, says Sam Bankman-Fried, CEO of FTX Crypto Exchange

It’s time to call algorithmic stablecoins something else, says Sam Bankman-Fried, CEO of FTX Crypto Exchange

FTX cryptocurrency exchange founder Sam Bankman-Fried ponders the future of stablecoins after two top cryptos suffered staggering losses this week.

Bankman Fried recently tweeted on how so-called stablecoins should have separate and more refined definitions after Luna Foundation Guard’s TerraUSD (UST) lost its peg to the US Dollar (USD) and took Terra (LUNA) with it.

“A good point brought up by someone recently: ‘stablecoin’ is really being used to mean several different things.

One thing it can mean is “stablecoin backed 1:1 by a US dollar in a US bank account”.

Current US draft regulations want to license this as a first step.”

The FTX CEO back then mentioned other stablecoin tiers that are prone to volatility and risk as they are not backed solely by dollar reserves but a mix of assets and liabilities.

“Another is ‘stablecoin backed >= 1:1 by liquid debt, government bonds 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 throughout this crash, and [I’m] Hearing of $1b+ redeemed successfully.

A third is “Stablecoin >= 1:1 hedged by a highly volatile asset”.

These are “algorithmic” stablecoins. If the underlying crashes, they can go under. A lot. B. VAT.”

When it comes to solutions, Bankman is Fried suggests Applying different definitions to the different versions of what currently falls under the broader umbrella of stablecoin terminology.

“We really shouldn’t use the same word for all these things. What we call “algorithmic stablecoins” are not actually stable like fiat-backed stablecoins.

They are more like structured products and need upside if they are to justify the risk.

This may not seem that important to people in crypto because we already know that algorithmic stablecoins are quite different from fiat-backed ones. But in politics, this message is often lost. We have to address that explicitly.”

In response to a question about whether FTX could help LUNA, given that Bankman-Fried was granted access to SushiSwap (SUSHI) decentralized exchange (DEX) admin keys in September 2020, the CEO says it’s unlikely.

“This could be tricky – the real, honest answer is that either UST or LUNA will likely need to go to 0 (or both).

There is no way to save both. (And it’s not yet clear that there’s a way to save UST’s binding, even by sacrificing LUNA.)”

At the time of writing, TerraUSD is down 41.7% and is currently valued at $0.49.

Meanwhile, Terra has imploded, falling from over $80 a week ago to $1 by May 11th. LUNA is down 99.03% on the day and is trading at $0.006645 at the time of writing.

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