Buterin thinks a stablecoin that generates a 20% annual return is akin to a Ponzi scheme. The co-creator of the Ethereum network says that a stablecoin is not safe just because it has passed some tests.
The recent drop in the TerraUSD (UST) price sent the overall cryptocurrency world into turmoil. The Terra network had designed that token to be a stablecoin and always trade at USD 1. Many wonder whether the same could happen to DAI from the Ethereum network, not collateralized by fiat money.
Vitalik Buterin, the co-creator of the Ethereum network, believes that this will not happen and explains why. In contrast to RAI, a stablecoin backed only by Ether (ETH), DAI has multiple collaterals in addition to ETH.
However, the ideas of the Russian-Canadian programmer can apply to DAI, a much more widely used stablecoin. Buterin writes that DAI is a hybrid system backed by centralized and decentralized collaterals. Although that is a reasonable option for their product, it complicates the analysis.
It was necessary to burn (destroy) the US dollar equivalent of the Terra (LUNA) cryptocurrency for issuing UST. The same happens in reverse since burning UST allows making an equivalent amount of LUNA available.
A seigniorage mechanism stimulated the market to expand or reduce the UST currency to keep the price at USD 1. That was not sustainable, which led the price of UST and LUNA to collapse.
The Differences Between RAI and TerraUSD Stablecoins
The mechanism is different between the stablecoins RAI (also applied to DAI) and TerraUSD. After depositing ETH as collateral in a smart contract, the lender can withdraw an amount of RAI and recover the ETH when repaying the debt.
Lenders usually do that to leverage ETH and go long if they think the price of that volatile asset will rise. They also do it to arbitrage by borrowing RAI to make a profit on the difference with an investment whose price increases.
Buterin explains that it would not be a problem if demand for RAI dropped considerably, even if only one holder remained. The redemption rate would skyrocket until the liquidation of the vaults of all lenders occurs. The remaining holder could buy the vault at the liquidation auction, use his RAI to pay off his debt, and withdraw the ETH.
The leader of Ethereum is confident that RAI and similarly functioning coins are more robust than a system like Terra.
The Lessons of What Happened with TerraUSD and LUNA
The developer reflects on what is possible to learn from the situation that the cryptocurrency industry experienced in the last month.
Buterin argues that cryptocurrencies must move away from the attitude of wanting to achieve security by relying on infinite growth. He adds that it is unacceptable to say that the fiat world works the same since it does not offer higher returns than the regular economy.
The co-founder of Ethereum proposes testing various developments in extreme situations. He even points out that they might not be safe even if they pass the tests, as they might be fragile for other reasons.
What Buterin said suggests that the user should be wary of anything that promises returns that are too good to be true. In the case of using stablecoins, it is necessary to evaluate their risks and benefits to make an appropriate decision.
By Alexander Salazar
