Ethereum (ETH) Creator Vitalik Buterin Says Algorithmic Stablecoins Shouldn’t Be Dismissed

Ethereum (ETH) founder Vitalik Buterin is weighing in on the future of automated stablecoins as the dust settles after the collapse of TerraUSD (UST) earlier this month.

In a new blog post, Buterin stresses the need for balance when evaluating the merits and risks within the world of decentralized finance (DeFi).

“The greater level of scrutiny on DeFi financial mechanisms, especially those that try very hard to optimize for ‘capital efficiency,’ is highly welcome.

The greater acknowledgment that present performance is no guarantee of future returns (or even future lack-of-total-collapse) is even more welcome.

Where the sentiment goes very wrong, however, is in painting all automated pure-crypto stablecoins with the same brush, and dismissing the entire category.”

The Ethereum co-creator lays out a pair of theoretical tests, one asking if an algorithmic stablecoin can “wind down” rather than outright collapse, the other considering how a stablecoin might stay pegged to an index that appreciated by 20% each year.

Buterin concludes by saying that crypto should avoid trying to mimic the fiat currency model of relying on perpetual growth, as well as highlighting the need to test a project’s strength in both stable and volatile conditions.

“The crypto space needs to move away from the attitude that it’s okay to achieve safety by relying on endless growth… because the fiat world is not attempting to offer anyone returns that go up much faster than the regular economy…

While we certainly should hope for growth, we should 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.

If a system passes this test, that does not mean it’s safe; it could still be fragile for other reasons (e.g., insufficient collateral ratios), or have bugs or governance vulnerabilities.

But steady-state and extreme-case soundness should always be one of the first things that we check for.”

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