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- Ethereum’s co-founder thinks stablecoin’s need a back-to-basics approach for future success.
- In a blog post, Vitalik Buterin said “principles-based thinking” will return confidence to the market
- After the collapse of Terra, Buterin also warned that endless growth isn’t sustainable.
Ethereum cofounder Vitalik Buterin thinks that the stablecoin collapse needs a back-to-basics approach for future success and confidence.
He touted “principles-based thinking” in a blog post entitled “Two Thought Experiments to Evaluate Automates Stablecoins” published Wednesday. Buterin also cautioned that expecting the broader cryptocurrency market to continue to notch limitless growth is detrimental.
“In general, the crypto space needs to move away from the attitude that it’s okay to achieve safety by relying on endless growth,” he wrote.
Instead, Buterin said, investors should move to “evaluate how safe systems are by looking at their steady state, and even the pessimistic state of how they would fare under extreme conditions and ultimately whether or not they can safely wind down.”
The remarks come after the crash of Terra earlier this month. The algorithmic stablecoin used code and relied on the minting and burning of a sister-token to maintain a peg to the dollar. But Terra crashed and sent the broader crypto market reeling.
As part of a thought experiment in his blog post, Buterin examined a hypothetical stablecoin tracking an index that promised 20% annual returns.
Such a stablecoin would have to charge some kind of negative interest rate to maintain equilibrium to cancel out growth from the index. Otherwise, it would turn into a Ponzi that suddenly collapses one day.
“Even outside of crazy hypotheticals where you build a stablecoin to track a Ponzi index, the stablecoin must somehow be able to respond to situations where even at a zero interest rate, demand for holding exceeds demand for borrowing,” Buterin wrote. “If you don’t, the price rises above the peg, and the stablecoin becomes vulnerable to price movements in both directions that are quite unpredictable.”
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