Vitalik Buterin shares how to build stablecoins using the “sustainable” algorithm.

Vitalik Buterin – Ethereum Founder, continues to offer personal thoughts around the recent collapse of Terra’s stablecoin UST and LUNA algorithm.

Buterin had agreed with the argument that UST was intrinsically a “Ponzi” model while claiming that the above event had affected other stablecoin and sustainable operation algorithm projects.

Vitalik Buterin was also one of the first supporters of the compensation solution for the former small LUNA investors instead of the significant funds, reflected in the Terra 2.0 network’s new LUNA token allocation plan launched in May 28.

On May 26, the Ethereum founder continued to publish a blog post, presenting two ways to develop a stable bitcoin algorithm while still ensuring sustainability but not using the “Ponzi model” for long-term maintenance.

Opening the blog post, Buterin writes:

“What we need now is protection or criticism of stablecoin, but instead, let’s go back to analysis from the most basic principles. Many stablecoin algorithms have hidden the risk of collapsing in the first place. Few coins are still in existence but are extremely risky. However, there are still stablecoins that are very strong on paper and have overcome the extreme challenges from the fluctuations in the cryptocurrency market.”

Vitalik Buterin has set 2 criteria for a stablecoin sustainability algorithm:

It is still possible to return the value to the investor even if the price drops to zero.

According to ETH founder, a successful stablecoin is when it still allows users to drain their liquidity despite the sell-off to zero safely.

In the case of UST, the above requirement could not be met because the model anchored the price to LUNA, causing the value of these two coins to be eroded to the point of “no cure.” Therefore, it is of the utmost importance that the value of the security coin (in the article called Buterin with the concept of ‘volcoin’) be stable and not contribute to the chain effect.

Vitalik Buterin then took the example of the stablecoin RAI algorithm on Ethereum, fully supported by ETH. Vitalik considers this the most “true” stablecoin algorithm project instead of using each ETH as a guaranteed value instead of ETH, USDT, and USDC.

Ethereum founder argues that because ETH is a significant asset and has gained solid trust from the market, the loss of value by RAI will not be able to follow ETH because the world’s second-largest cryptocurrency is widely used throughout the Ethereum ecosystem, not depending on RAI as how LUNA depends on UST.

The RAI price will be maintained around the $3.14 mark instead of the $1 mark.

Provide a “reasonable” interest rate

The main reason LUNA-UST is popular is the provision of an annual UST deposit rate of up to 20% per year through the Anchor Protocol.

Vitalik Buterin said that the provision of deposit interest by a stablecoin to attract users will inevitably lead to Ponzi. However, if the project still wants to give welfare to users, stablecoin must have some “negative interest” mechanism to suppress the amount of interest paid.

It is conceivable that Vitalik Buterin advises stablecoin projects that if you have made a stable currency, then put the stability factor first instead of increasing the instability by applying an interest rate to it.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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