Do we still TRUST THEM? / Algorithmic Stablecoins [Terra UST, DAI, USDD, FRAX]

Today we’ll talk about one of the most recent, controversial subjects - algorithmic stablecoins. We’ll go through how they work, what pros and cons they have, and try to predict their direction moving forward.

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🟡 What are algorithmic stablecoins A smart contract between two types of coins is the basis for algorithmic stablecoins - one is stable and the other supports it with the goal of maintaining a parity - what we would call a currency peg. The price of a stablecoin can fluctuate based on supply and demand just like any other cryptocurrency. But in order to prevent the de-pegging - meaning, in order for that token to keep its 1:1 parity with a coin such as the dollar or euro - the algorithms establish the relationship between supply and demand.

🟡 How do Algorithmic Stablecoins work? Unlike other types of stablecoins, such as USDC or USDT, which are presumably supported by money and other reserves, the TerraUST project worked based on the UST - LUNA relationship with LUNA being the coin of the Terra ecosystem.

🟡 Benefits of Algorithmic Stablecoins You may wonder what are the benefits of such a stablecoin. The most obvious one is the 1:1 parity with a trusted fiat currency such as the American dollar. Another important aspect represents building DAOs and making the governance of such structures possible

🟡 Risks of Algorithmic Stablecoins What are the risks associated with these stablecoins? Although they may look like a low-risk class of cryptocurrencies, they actually can be highly volatile - the best (or worst) example is TerraUST. There is a risk that the coin won’t be able to maintain its 1:1 parity as there is no guarantee for users if the stablecoin starts losing value. Algorithmic stablecoins can lead to arbitrage opportunities which can harm their stability.

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#AlgorithmicStablecoins #UST #TerraUST #USDD #Cryptomatics #Binance #Crypto #FinancialEducation ... https://www.youtube.com/watch?v=NiUBATIKVTE