The founder of Ethereum speaks about ways to assess the reliability of stablecoins

Despite the recent collapse of the Terra project and the presence of “many imperfect” stablecoins, the crypto industry should not abandon such projects. This statement was made by Vitalik Buterin.

The creator of Ethereum pointed out that the collapse of UST provoked an increase in interest in decentralized finance and crypto models with high profitability. Buterin welcomes this, but does not support the view that all stablecoins are “cut with the same brush”.

“What we need is not boosterism or excessive pessimism about stablecoins, but rather a return to principle-based thinking,” he wrote.

The crypto enthusiast suggested two ways to determine the reliability of a “stable coin”. Firstly, you need to understand whether a stablecoin is capable of “rolling up” to zero users without any risks. In the event of a decrease in the activity of such crypto coins “almost to zero”, their owners should be able to extract a fair price of their own investments from the coin.

Buterin believes that UST does not pass such a test due to its own collateral structure, which is linked to LUNA’s quotes. The founder of Ethereum is sure that such projects must influence their value and demand, otherwise they will collapse.

“First, the price [of the collateral] falls. The shock is then transferred to the stablecoin itself. The system is trying to support the demand for the stablecoin by issuing more collateral coins. As trust in the system is low and there are few buyers, the price [of the collateral] falls rapidly. When the price of the latter is close to zero, the stablecoin collapses,” he explained.

According to Buterin, another question that allows you to assess the reliability of a stablecoin is what will happen if you tie the coin to an index with a growth of 20% per year.

“For a stablecoin that is trying to track such an index, there are two scenarios. It charges holders a negative interest rate, essentially balancing out growth rates […]. It turns into a Ponzi, providing stablecoin holders with amazing income for some time,” he wrote.

However, the founder of Ethereum noted that the fulfillment of such a condition does not automatically make the token “safe”.

“It may still be unstable for other reasons (for example, insufficient margin), have bugs or vulnerabilities associated with the management mechanism,” concluded Vitalik Buterin.