Ethereum co-founder Vitalik Buterin has shared two thought experiments on how to evaluate whether an algorithmic (algo) stablecoin is sustainable.
In a Wednesday blog post, Buterin noted that the increased amount of scrutiny placed on crypto and decentralized finance (DeFi) since the Terra crash is “highly welcome,” but he warned against writing off all algo-stablecoins entirely.
“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking,” he said:
“While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and plenty more that can survive theoretically but are highly risky, there are also many stablecoins that are highly robust in theory, and have survived extreme tests of crypto market conditions in practice.”
His blog focused on Reflexer’s fully Ether (ETH)-collateralized RAI stablecoin in particular, which isn’t pegged to the value of fiat currency and relies on algorithms to automatically set an interest rate, proportionally opposing price movements and incentivizing users to return RAI to its target price range.
Buterin stated that it “exemplifies the pure ‘ideal type’ of a collateralized automated stablecoin,” and its structure also gives users an opportunity to extract their liquidity in ETH if faith in the stablecoin crumbles significantly.
The Ethereum co-founder…