TL;DR Breakdown
- The usefulness of stablecoins continues to drop due to increasing instability.
- The major cause of instability remains unknown.
As the name implies, an algorithmic stablecoin is one that should be stable. However, many algorithmic stablecoins have been unstable. This then begs the question of why these stablecoins have proven to be unstable and hence, how useful they actually are.
In 2020, many gained interest in decentralized finance, prompting the rise in algorithmic stablecoins attention. Some examples of these coins include DefiDollar (USDC), Ampleforth (AMPL), and Frax (FRAX). Although these coins are dubbed stablecoins, their makers have contrary opinions.
For instance, Ampleforth do not regard their native token as a stablecoin. Also, MakerDAO, the owners of Neutrino and Empty Set Dollar, has its definition of algorithmic stablecoins. According to the makers of ESD, an algorithmic stablecoin “is one that maintains a peg using total supply manipulations.”
Judging by the definition from MakerDAO, coins like ESD are still showing significant instability. According to data from Coingecko, ESD has an all-time high of $23.88 and an all-time low of $0.174, which is quite displeasing.
With the current instability, are algorithmic stablecoins useful?
Presently, algorithmic stablecoins are showing considerable instability, prompting many to question their usefulness. According to ESD’s team, its effectiveness lies in maintaining a peg using an incentive mechanism. Similarly, Ampleforth has an advantage — its prominence in dominating stable contracts in terms of value. But do these statements or features make these stablecoins useful?
When measuring a currency’s usefulness, three features should be considered: A right unit, a good store of value, and an acceptable form of exchange. Judging by these three features, cryptocurrencies like Bitcoin and Ethereum prove credible. Ampleforth, on the other hand, has shown too much volatility to be considered a useful stablecoin. With this said, algorithmic stablecoins have seen less adoption in the US.
There is still hope for new mechanisms that will add value to the use of algorithmic stablecoins. It is, however, uncertain if the ones available are efficient enough to be useful in this regard.
