Luna ushered in an average daily decline of about 90% last week, and it almost returned to zero overnight. Even exhaustion of all strength could not prevent UST from breaking the anchor. In this panic-stricken market, I try to write down my thoughts on algorithmic stablecoins - algorithmic stablecoins will become the most important financial cornerstone in the crypto world.

1 Why stablecoins are so important to the crypto world

The world has been accustomed to being denominated in dollars for far too long, and in marketing parlance, mental resources are the most powerful traffic pool. Before the subversive changes in the world structure, the United States is still on top of the world, and it is an overly arduous task to directly move from the U standard to the crypto currency standard, and it will even bring about huge backlash. However, the encrypted world urgently needs to have direct interaction with the real world, and stablecoins are almost the only choice - in line with people's minds, connecting on-chain and off-chain.

It is no exaggeration to say that in my eyes, stablecoins are much more important to the crypto world than BTC. Since the birth of BTC as a currency, it has still struggled as a currency for large-scale settlement transactions or as a basis for pricing. But as for stablecoins, it’s quite natural – it’s natural to use 5usdt to buy a commodity with a unit price of 5usd. In this way, the encrypted world has realized the docking with the real world.

2 Why is it unimportant whether algorithmic stablecoins are creating something from nothing?

From a one-dimensional perspective, all currencies are creating something from nothing, and the decoupling of the US dollar from gold is also a historical necessity, and the rapid progress of human society in the past 200 years has thrown away the development of the past 10,000 years based on credit expansion achieved(creating something from nothing).

Therefore, it is not important whether it is creating something from nothing. What is important is whether the anchoring can be made effective, whether a broader and valuable application ecology can be established, and whether there is a certain response mechanism in the event of a crisis.

At the same time, why do I care more about algorithmic stablecoins than other stablecoins? Because on the one hand, the common stable currency that relies on a high proportion of mortgages is contrary to the logic of credit expansion, and naturally inhibits efficiency and development. (Although the real decentralized projects seem to be almost invisible, there are differences in degree and potential, and the stable potential is the highest in my eyes).

3 How to design a more robust algorithmic stablecoin than UST

In addition to the above, to establish a broader and valuable application ecology (seems that everyone agrees that this is the foundation), the most important thing is obviously how to anchor the US dollar.

In fact, the collapse of luna has proved to a certain extent that the idea of ​​relying on arbitrage to achieve anchoring is indeed effective, because arbitrageurs have indeed acted efficiently and on a large scale. I even doubt if the exchange mechanism between luna and ust is not so rigid, ust may be able to restore the anchor in a few days.

Therefore, I think that the arbitrage drive is still worth continuing to use, and the exchange mechanism of the dual currency can be designed to be more refined, so as to be sufficient to cope with the more extreme de-anchoring scenarios. In addition, if there is a chance, the traditional monetary policy model can also be added to the model based on the algorithm, which can realize deflation and inflation more naturally.

The above are some of my small expectations for the computing stability. When the algorithmic stablecoin can gain a firm foothold, the application ecology of the encrypted world can be fully developed while interacting with the real world without too much effort for the time being. Only then will there be a chance for the currency standard era came to lay the foundation.