Crypto and blockchain influencer, the co-founder of the Ethereum blockchain, Vitalik Buterin published an analytical article about algorithmic stablecoins and how they can operate efficiently. The most essential thing about stablecoin protocols is resiliency, according to Buterin.
He wrote that the LUNA collapse caused billions of dollars of losses, which raised a wave of criticism of algorithmic stablecoins as a class. While many consider the class to be a structurally flawed product, Buterin finds that the high level of scrutiny, especially the ones that attempt to optimize for capital efficiency is highly appreciated.
However, he mentions that not all automated stablecoins should be looked at the same way. Buterin says there are many designs that are flawed, being destined to fail. On the other hand, there are plenty more that can get through theoretically but are highly risky. There are also many stablecoins that have overcome extreme tests of the crypto market. Buterin said the industry needs principles-based thinking. For this purpose, he puts down two questions that need answers.
The first one is whether the stablecoin can safely come close to zero users. Another question is what will happen if you try to peg the stablecoin to an index that gains 20% per year. Buterin mentioned that it is necessary for a collateralized automated stablecoin to be sustainable to execute a negative interest rate. He says a stablecoin project becomes a Ponzi scheme when it gives stablecoin holders high profits until one day the system collapses suddenly.