With terra UST a popular algorithmic stablecoin losing its peg, the future of uncollateralized stable assets is pretty uncertain, collateralized stablecoins like Tether (USDT) and USDC have withstood several market pressure although slightly losing their pegging value when there is a high market volatility compared to that of algorithm coins investors are more confident of the dollar-backed stablecoins since the decentralized unbacked dollar-based asset has always failed to maintain its $1 peg value during the most market crash.
Decentralization (DeFi) is all about being in charge of a self-governance monetary system for DeFi to achieve this complex goal they have to introduce a stablecoin not back by any physical collateralized asset but purely based on an algorithmic set of rules and instructions that could maintain market pressure this new technology is very complex to achieve with UST being a typical failed experiment that led to billions worth of invested funds lost can we fully trust a decentralized stable coin should we continuously play a game of luck till we get it right and fully have a successful test on the algorithm stablecoin?
What are Algorithmic stablecoins
Conventional stablecoins like the USDT are used by investors and traders to protect themselves against market uncertainties they maintain a $1 peg value with the help of the U.S.-backed dollar used as collateral using a centralized entity held in banks.
Algorithmic stablecoins are the opposite of conventional stablecoins they are not backed by the U.S. dollar and are equally not held or maintained by a centralized banking system they are uncollateralized which makes them more decentralized and free from governmental control.
How algorithm stablecoins work.
Like any other stablecoin, algorithmic stablecoins are designed to maintain a $1 peg they are written instructions designed with various mechanism sets of rules which can be publicly viewed on a blockchain protocol for anyone to access.
Rebase algorithmic stablecoins work by manipulating the base supply to maintain its $1 peg by either minting or burning supply from circulation if the proposed stablecoin price change in price from its $1 peg by increasing in price the mechanism will burn supply while if it's reduced in price the mechanism will automatically add or mint more stablecoin this is done continuously, to constantly maintain the price of the said algorithm stablecoin. example Ampleforth (AMPL)
Seigniorage algorithmic stablecoins use two coins the likes of Terra UST and Luna one coin serves as a stablecoin (UST)while the other serves to maintain the peg of the stablecoin it uses a combined based protocol mint system couple with a burn mechanism and free market mechanism here traders or investors buy the none stablecoin to push or maintain the stablecoin pegging. if one coin is overbought/sold there will be a change in the price peg of stablecoin to maintain balance burning mechanism will be introduced which will help stabilize the price of the stablecoin.
Tron blockchain uses the Seigniorage algorithm method, with USDD and tron ( TRX), hope this does not end up crashing down as seen with luna blockchain.
The future of algorithmic stablecoins
Algorithmic stablecoins pose a serious threat to the government knowing fully a stable sustainable algorithm stablecoin could remove user dependence on governmental fiat currency.
Although we are yet to have a stabilized algorithm stable coin as investors are not confident about its validity to hold its pegging price when there is high market volatility tron USDD has also failed to maintain its $1 peg which shows there is more room for improvement and development for algorithm stablecoins.
A major concern here is can we have an algorithm coin back be a programmable set of instructions that are bound to always lose their peg during market turbulence?