"What Are Algorithmic Stablecoins?
Stablecoins are a type of cryptocurrency that aim to maintain a stable value. There are several classes of
stablecoins that each use different methods to try to achieve this, one of which is algorithmic stablecoins.
While no precise definition captures all of their features, algorithmic stablecoins typically use an
algorithm or smart contract to manage the supply of tokens and guide their value to some reference asset
(for example a fiat currency, such as the U.S. dollar). Algorithmic stablecoins generally do not attempt to
achieve value by holding a reserve of fiat-denominated assets with a value in a 1:1 relationship with the
value of the stablecoin. Instead, algorithmic stablecoins use different mechanisms to control the supply or
value of the stablecoin, including the minting or burning of coins, rebasing, and arbitrage.
What Happened with TerraUSD?
TerraUSD (UST) stablecoin uses an arbitrage mechanism typical of some algorithmic stablecoin
arrangements consisting of two coins or tokens: the stablecoin, in this case UST, meant to maintain a
stable value or “peg,” and a balancer token, in this case,LUNA, the value of which can fluctuate. An
algorithm manages the relationship between these two coins to attempt keeping the stablecoin pegged to
the reference. If strong demand pushed the price of UST above its peg, arbitrageurs could buy $1 worth of
LUNA, trade it for 1 UST (worth more than $1) and sell UST for a gain. If UST falls below $1, someone
can buy $0.99 worth of UST and trade it for $1 worth of LUNA. In both instances arbitrageurs net a profit
and ostensibly maintain the peg.
Over the past week, UST llost its peg to the dollar (Figure 1), and both UST and balancer coin LUNA
were dropped from various cryptocurrency exchanges. UST hit a low of $0.12 at 9 a.m. on May 16, 2022..."
Stablecoins
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