$USDH Throwback Time. Capital Efficiency in Stablecoin Design. 04/12/22.

31 Jul 2022, 09:45

$USDH 📰🔄 Throwback Time! Capital Efficiency in Stablecoin Design 04/12/22 “Algorithmic stablecoins are very capital efficient, as they don't require much (or any) collateralization. When it comes to price stability, algorithmic stablecoins have consistently failed.” A month after this article emerged on Hubble's blog, $20 billion worth of algorithmic stablecoin value evaporated in hours. UST went from slightly de-pegged at $0.98 to full-on bank run de-pegged, locked in a death spiral with its seignorage token, LUNA, and it was no longer capital efficient to mint or hold a dollar token zooming to zero. It's been argued that algo stablecoins are an exercise in futility because they: 1. Require consistent support levels (demand) 2. Need market actors to independently cooperate and arb 3. Depend on accurate price information It's nearly impossible to keep these three factors in check. First of all, how can a stablecoin project create infinite demand in a decentralized manner? Now, the stablecoin cemetery is full of "capital efficient" stablecoins that failed when the market applied pressure or users exploited inaccurate price feeds or another part of an algo stable's elaborate design. The verdict is in: collateralized stablecoins like USDH are less capital efficient than 1:1 fiat-backed stables, but they are far more capital efficient than algo stables, which have consistently burned users when they fail to hold their peg.