An article to understand the risks of algorithmic stablecoins in detail?

Maybe many investors don’t know much about algorithmic stablecoins. In fact, it is a type of stablecoin. There are three types of stablecoins now, namely ordinary stablecoins, multi-asset mortgaged stablecoins, and our Today I will introduce the algorithmic stablecoin to you. This algorithmic stablecoin is a currency that adjusts the total amount of currency in the market based on an algorithm to stabilize the price.

Are algorithmic stablecoins risky?

Supporters say algorithmic stablecoins are better than traditional stablecoins because they are not run by a single centralized entity. Instead, they run autonomously on a blockchain-based network, relying on traders who may be anywhere in the world to peg them to the U.S. dollar. This design makes it harder for regulators to control algorithmic stablecoins, which is often seen as an advantage in cryptocurrency circles. U.S. regulators have stepped up scrutiny of stablecoins in recent months, but have mostly focused on asset-backed coins.

The stablecoins of early algorithmic stablecoins were not supported by actual demand and were basically based on games. In its early days, it was highly speculative, and there was bound to be great fluctuations. In the process of this fluctuation, it was bound to be a zero-sum game, with some making money based on others losing.

Therefore, in the early days, the editor always emphasized that if you are not familiar with the mechanism, it is best not to enter the game. Unless one has a deep understanding of the matter itself, it is best not to participate.

Before the algorithmic stablecoin is successfully implemented, it will experience countless life and death struggles. The vast majority of algorithmic stablecoin projects will eventually fail and become useless.

The future of algorithmic stablecoins

Algorithmic stablecoins are still in the early stages of development. It is difficult to say how they will develop in the future, but it can still be predicted based on the phenomena observed in recent days.

We believe that the anchor point of algorithmic stablecoins may deviate from one dollar in the future. Avalanche Protocol founder Emin Gün Sirer tweeted yesterday: Algorithmic stablecoins may indeed have an anchor point, but this value is not necessarily $1. He also gave the example of DSD, which is currently trading at $0.38 and does not have enough DeFi participants to increase its price to $1. When DSD is above $0.38, these people will think they have made enough money and sell when they think DSD is above the entry level of others.

This phenomenon is caused by the existence of a complete "currency" adjustment mechanism within the algorithmic stablecoin. This adjustment mechanism is essentially determined by market supply and demand. The US dollar price is more stable in the algorithmic stablecoin system. Most are reference prices, so algorithmic stablecoins do not have to be anchored to the US dollar price. At present, the scale of algorithmic stability is still small, and the volatility is relatively large; however, according to observations, as the volume of algorithmic stablecoins expands, the volatility of algorithmic stablecoins is also decreasing. After algorithmic stabilization is more widely adopted, a more accurate anchor point will also emerge. At this time, the volatility of algorithmic stablecoins will also be greatly reduced, thus becoming widely accessible to the crypto market and a complete set of "currency “The system will also mature. By then, the combination of algorithmic stablecoins, DeFi, Bitcoin and other crypto assets will form a complete crypto economy.

In addition, we believe that algorithmic stablecoins anchored to a basket of legal currencies may appear in the future. On the one hand, this is because the U.S. dollar is declining and there is diversified competition among currencies in traditional financial markets. A basket of currencies can better reflect the monetary value of assets; on the other hand, the "currency" in the crypto market naturally has no national boundaries and is benchmarked against global assets, so there is no need to It must be anchored to the US dollar. If it can be more diversified, it will be better able to adapt to the future diversified development of the crypto market.

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