Can We Trust Algorithmic Stablecoins? The Collapse of LUNA And UST

What eventually brought down UST and LUNA was a bad design of the algorithmic balance that should maintain the peg of UST to the US dollar. It was an algorithm that worked OK as long as market conditions were not very challenging . Additionally, the algorithm didn’t seem to have any “fail safe” switches.

However, the decisions made by the Terra team were not optimal. When it was clear that the “attack” (call it “panic”, call it whatever) was creating a “death spiral” that was not going to be able to maintain the UST-USD peg AND was also bringing down LUNA with it, possibly the best decision would have been to stop transactions and analyze what was going on and why. Another option could have been to limit value of transactions for “X” hours. Or simply unpeg UST from USD and unlink it from LUNA. While this last option would have not saved UST initially, it could have saved LUNA and the BTC reserves LUNA Foundation had which could have been used later on to try to bring the price of UST again close to USD even if unpegged.

I think algorithmic stablecoins can work BUT they need proper, careful design and implement a series of fail safe switches to avoid what happened to LUNA from happening again.

This article is NOT financial advice.