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Terra is transitioning from a dollar-pegged stablecoin to a bitcoin-backed stablecoin

Anthony Pompliano | March 21, 2022

Do kwon terra - Terra is transitioning from a dollar-pegged stablecoin to a bitcoin-backed stablecoinAlgorithmic stablecoins elicit intellectual curiosity from people across disciplines. Whether you are coming from the technology industry, finance, or academia, creating a digital currency that holds stable value without being pegged to another asset is a fascinating problem. The value of this type of asset is obvious, but no one has been able to figure it out.

In November, Ryan Clements published a paper tilted Built to Fail: The Inherent Fragility of Algorithmic Stablecoins, where he argued:

“Algorithmic stablecoins are inherently fragile. These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability. Iterations to date have struggled to maintain a stable peg, and some have failed catastrophically. This Article argues that algorithmic stablecoins are fundamentally flawed because they rely on three factors which history has shown to be impossible to control.

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First, they require a support level of demand for operational stability. Second, they rely on independent actors with market incentives to perform price-stabilizing arbitrage. Finally, they require reliable price information at all times. None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility.”

This is important context because there is an experiment underway in crypto that is worth paying attention to.

Terra is undergoing a transition from a dollar-pegged stablecoin to a bitcoin-backed stablecoin. There is a lot to unpack here, so let’s start from the top. Terra is described as a public blockchain protocol deploying a suite of algorithmic decentralized stablecoins which underpin a thriving ecosystem that brings DeFi to the masses. The stablecoin at the heart of this ecosystem, TerraUSD (known as UST), sits at more than $15 billion in market cap.

So what is Terra going to do differently with UST moving forward? They are going to back UST with bitcoin.

See:  How Stable is your Stablecoin?

So what are the ramifications of this decision by Terra?  First, Terra is becoming a persistent buyer of bitcoin.  Second, Terra is highlighting the opportunity for bitcoin-backed assets.  Third, bitcoin gets a credible layer two in Terra, one of the largest smart contract platforms in the world.

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NCFA Jan 2018 resize - Terra is transitioning from a dollar-pegged stablecoin to a bitcoin-backed stablecoin The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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