A16z: correct the name of stable currency

Original author: a16z crypto 

Crypto critics are using a virtual currency linked to the dollar Terra The thunderstorms are used as ammunition for attacking stable coins and the entire crypto industry.

However, losing oneself in the conversation is the root cause of the market turmoil. A better understanding of what's wrong with the stable currency industry – and why – can help protect consumers while protecting innovation.

First, it is important to clarify the term "stable currency". Stable currency is a cryptocurrency whose price is nominally "linked" to stable assets such as the US dollar. People usually attribute the recent Terra thunderstorm to the failure of so-called "algorithmic stable coins", which are usually programmed to automatically stimulate the creation and destruction of tokens to maintain the price linkage.

The attack on them was a complete digression. Terrausd should never be regarded as a "stable currency". The real problem here is not related to computer code, but related to the concept as old as finance itself: mortgage, or use of assets to support value.

This is a key point that policymakers around the world need to consider when drafting legislation to prevent future Terra like collapses. If legislators believe that algorithms are to blame, they may enact regulations that are counterproductive and stifle innovation. Poorly designed laws may disrupt the market, encourage regulatory arbitrage, and weaken the influence of Western democracies in the emerging, decentralized Internet economy Web3.

The commitment of decentralized Finance - defi - largely depends on the breakthrough ability of the blockchain, that is, the implementation of transparent and algorithmic contracts with immediate certainty.

In the recent market fluctuations, the vast majority ofBitcoinandEthereumAnd other "decentralized" stable currencies supported by blockchain assets have performed well and can cope with extreme price fluctuations and unprecedented redemptions. Generally speaking, the algorithm is not the problem faced by modern stable coins. On the contrary, almost all the risks now come from their collateral design.

The problems faced by the most risky stable coins are obvious: their collateral is obviously insufficient (less than $1 is required to create a stable coin of $1), and they rely on "endogenous" collateral (collateral created by the issuer, such as governance tokens that give the holders the right to vote on the rules and procedures of the block chain).

Endogenous collateral will bring about dangerous and explosive growth: when the issuer's governance tokens appreciate, users can create more stable coins. Before considering the other side, this sounds good: when prices fall – as is actually guaranteed during a bank run – cascading collateral liquidation to meet redemption triggers a death spiral, as happened in terrausd.

Regulation is necessary to prevent similar failures, but overly strict rules are not. The fact is that enforcement actions under existing securities laws and anti fraud regulations may have curbed the proliferation of almost all failed stable currencies to date.

Even so, additional, targeted regulation may be beneficial. Although it is difficult to pinpoint where regulators should establish collateral requirements, it is clear that without barriers, stable currency issuers may again take unreasonable risks.

Customized rulemaking can support the crypto ecosystem and protect consumers. Large scale changes – such as a complete ban on the use of algorithms and digital assets as collateral – will place a huge burden on the booming defi industry, disrupt the digital asset market, and hinder Web3 innovation.

This is because stable currency can indeed remain stable if its collateral is properly managed. For the "centralized" stable currency supported by real-world assets, the liquidity and transparency of reserves may be low, so the collateral should include assets with less volatility such as cash, treasury bonds and bonds. Regulators can establish parameters for these types of collateral and require regular audits.

For "decentralized" stable coins, almost only bitcoin orEthereumSuch as blockchain assets as collateral is optional. Although digital assets often fluctuate, they also have high liquidity and can be managed transparently through algorithms. Mobility can occur almost instantaneously, thus achieving a more efficient system. Therefore,Decentralized stable coins may eventually be more flexible than centralized stable coins

Algorithmic stable currency provides a unique opportunity to make various assets productive and drive global digital commerce. Setting up fences around their collateral can help unleash this potential.