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This is an amazing explanation. Thank you!
by gadnuk 4y ago
This is an amazing explanation. Thank you!
- usednet 4y agoThat explanation is not correct. Algorithmic stablecoins rely on a pairing with another crypto, in UST’s case LUNA. 1 UST can always be swapped to $1 US dollar of LUNA. It is interchangable, so $1 US dollar’s worth of LUNA can also be swapped for 1 UST. Hence, the “algorithmic” in the name. This way traders are always incentivized to keep the price of UST at $1. There is no collateral requirement. In UST/LUNA’s case they had collateral, mostly in Bitcoin, in the Luna Reserve Guard but their collateral proved insufficient. Some algorithmic stablecoins are entirely uncollateralized.
- thematrixturtle 4y agoThat's all irrelevant, since Tether is not an algorithmic stablecoin, and they claim to have 1:1 reserves for every USDT.
- usednet 4y agoThe parent comment was edited to remove the section on UST after my comment.
- benjaminwootton 4y agoI still don’t follow why the second currency is required? They will always swap a UST for $1 of LUNA so a UST is implicitly worth $1. LUNA itself doesn’t have anything behind it though apart from concidence. So we have a stablecoin manufactured from a volatile unbacked asset where the market cap can fall arbitrarily low. I know it failed, but it’s not quite clicking for me what they were even trying?
- nly 4y agoAnd if the LUNA/USD market becomes insanely volatile or the liquidity vanishes, the algorithm will fail.
- charcircuit 4y agofyi ampleforth is an example of a algorithmic stable that doesn't pair with another crypto. Some algorithmic stablecoins incorporate a rebase mechanism when the price deviates from the peg.