For those investors who believe that cryptocurrency will eventually replace money, algorithmic stablecoins were thought to serve as a middle ground. In this Motley Fool Live segment from "The Crypto Show," recorded on June 1, Fool.com contributor Chris MacDonald examines the uncertain state of stablecoins in the crypto space right now.
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Chris MacDonald: Maybe taking a step back, Terra's USD, which was their algorithmic stablecoin, crashed and I think it's still trading sub 10 cents. That's supposed to be pegged to the dollar, that was backed by Luna. Waves, which is a different project, they have Nutrino, which is USDN and that's another algorithm extend essentially the same thing, which gets backed by the Waves token and the Waves ecosystem. Similar minting and burning mechanism. Similar in a lot of ways and a lot of people expected well, if Terra and its Luna token failed, what's the future holds for Nutrino? Nutrino lost its peg in a big way, down to 75 cents, and it actually didn't reach a dollar over the past few days. On an intraday basis, I think right now, it's around 98 cents. It's regained its PEG for all intents and purposes.
But the question here, and it's a larger debate and certainly we can talk about this, is what the future is for algorithmic stablecoins? I think from a high level, a lot of people were hoping that these would succeed because that's the only way that the crypto community can move completely away from fiat. If there's going to be a future without fiat money, then that's the crypto purest perspective.
Jon Quast: If we're not using fiat, then what are we stable to?
Chris MacDonald: Well, I mean, it's going to be maybe exchangeable with another proxy like the US dollar. But I think there's a lot of people that want complete. I agree it's got to be an integrated approach in order for us to work with the real world. But for those who believe that crypto will replace money, and there's still that idea out there, algorithmic stablecoins are supposed to be that middle ground. This really shook the confidence of investors in algorithmic stablecoins. But Waves didn't see the same complete fallout and I think part of that at least my take on this, is a lot of the issues that Terra had, was around liquidity in the current pool being pulled. There were three or four things that happened in sequence that made it happen. Whether that means that Waves USDN coin will survive or not remains to be seen. Notably, there have been some analysts who called out issues with Waves and how they're reportedly collateralizing USDN borrowing on the Vera stock finance DeFi lending program that's on Waves to essentially use those proceeds to buy Waves tokens and burn those tokens for more USDN and rinse and repeat. That's been one of the allegations out there, that essentially there's some manipulation going on with all these algorithmic stablecoins and therefore, they can't survive long term.
If the price of Waves drops enough, essentially you get into that death spiral again. There's some investors that might just be saying this is too risky to touch, I can understand that. For right now, I think there's very little faith in this space. But that being said, people who bought USDN at 75 cents bought 75 cent dollars, at least in the short term. There's still that arbitrage opportunity for now. Whether that holds over the long term, that's the big question.
