Algorithmic stablecoins like terraUSD – which collapsed causing a plummet in the cryptocurrency market – are unlikely to survive, the co-founder of digital currency Tether told CNBC.
Stablecoins are a type of cryptocurrency that is usually linked to a real-world asset. TerraUSD, or UST, is an algorithmic stablecoin that was supposedly pegged to the US dollar.
While stablecoins, such as Tether and USD Coin, are backed by real assets, such as fiat currencies and government bonds, in order to maintain the link to the dollar, UST is governed by an algorithm.
The UST lost its peg to the dollar and this also led to the plummeting of the Luna stablecoin, which also reached 0 against the dollar.
This drop brought warnings that algorithmic stablecoins may not have a future.
“It is unfortunate that the money … was lost, however it is not surprising. It is an algorithmic stablecoin backed by algorithms. So it’s just some smart people trying to figure out how to link something to the dollar,” he said.
“A lot of people withdrew their money in the last few months because they realised this was not sustainable. So this collapse has had a sort of chain effect. And it will probably be the end of most algorithmic stablecoins.”
Collins is also a co-founder of Tether, which is not an algorithmic stablecoin and claims to be backed by fiat money as well as US and corporate bonds. Tether, also briefly lost its connection to the dollar before regaining it.
Jeremy Allaire, CEO of Circle, one of the companies behind the USDC stablecoin release, said he believes people will continue to work on algorithmic stablecoins.
“I have compared algorithmic stablecoins to the fountain of youth or the Holy Grail. Others have referred to them as financial alchemy. And so there will continue to be financial alchemists who work on the magic potion to find the Holy Grail of a stablecoin algorithmic digital currency. So I expect that this pursuit will continue,” Allaire told CNBC.
“Now, what happens with the control around that is a different matter. There will be, you know, clear lines about what can interact with the market. What can interact with the financial system, given the risks that are there,” he added.
The cryptocurrency market expects tighter regulation for stablecoins, especially after the collapse of terraUSD. Bertrand Perez, CEO of the Web3 Foundation and former director of Facebook-backed Diem stablecoin, expects regulators to require that such cryptocurrencies be backed by real assets.
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