FTX cryptocurrency exchange founder Sam Bankman-Fried is weighing in on the future of stablecoins after two top cryptos suffered staggering losses this week.
Bankman-Fried recently tweeted about how so-called stablecoins ought to have separate and better-refined definitions in the wake of Luna Foundation Guard’s TerraUSD (UST) losing its US dollar (USD) peg and taking Terra (LUNA) down with it.
“A good point someone brought up recently: really ‘stablecoin’ is used to mean multiple different things.
One thing it can mean is ‘stablecoin backed 1:1 by a US dollar in a US bank account.’
That’s what current drafts of US regulations are looking to license, as a first step.”
The FTX CEO then mentions other stablecoin tiers which are susceptible to volatility and risk because they’re not backed strictly by dollar reserves but a mix of assets and debts.
“Another is ‘stablecoin backed >= 1:1 by liquid debt assets, treasuries, and USD’. Non-zero price risk, but generally they stay very close to $1 because they can be redeemed.
For example [Tether] USDT has stayed within a few % of $1 during this crash, and [I’m] hearing $1b+ successfully redeemed.
A third is ‘stablecoin backed >= 1:1 by a very volatile asset.’
Those are ‘algorithmic’ stablecoins. If the underlying crashes, they can go down. A lot. e.g. UST.”
When it comes to solutions, Bankman-Fried suggests applying distinct definitions to the different versions of what currently falls under the broader stablecoin terminology umbrella.
“Really we shouldn’t use the same word for all of these things. What we call ‘algorithmic stablecoins’ aren’t really stable in the same way that fiat-backed stablecoins are.
They’re more like structured products, and they need upside if they want to justify the risk.
This might not seem as important to people in crypto, because we already know that algorithmic stablecoins are pretty different from fiat-backed ones. But in the policy space, that message often gets lost. We need to be explicit about it.”
In response to a question asking if FTX might come to the aid of LUNA in light of Bankman-Fried gaining access to admin keys of the SushiSwap (SUSHI) decentralized exchange (DEX) in September of 2020, the CEO says it’s unlikely.
“This one might be tough – the real, honest answer is that, probably, either UST or LUNA have to go to 0 (or both).
There’s no way to save both of them. (And it’s not clear as of now that there’s any way to save UST’s peg even if you sacrifice LUNA.)”
At time of writing, TerraUSD is down 41.7% and is currently valued at $0.49.
Meanwhile, Terra has imploded, falling from above $80 a week ago to a dollar by May 11th. LUNA is down 99.03% on the day and priced at $0.006645 at time of writing.