Samson Mow, Paolo Ardoino, Adam Back, Gabor Gurbacs, and Arnab Naskar shed some insight into the fundamental differences between collateralized stablecoins (fully backed by USD or other reserves) and algorithmic stablecoins (which rely on smart contracts to maintain price stability).
Adam Back explained the difference: “the biggest and most widely used stablecoins by volume are 100% collateralized–even slightly over-collateralized–in the sense that they have USD cash reserves, different kinds of commercial paper, and unlike a bank, which is fractional lending, they don't have fractional lending. They just have different types of U.S. dollars they can draw on with different short term maturities to satisfy redemptions.
The so-called 'algo' stablecoins are some sort of smart contract trading bot that has one or more assets and tries to sort of create economic incentives to maintain a stable price and over the last four hours we saw what happens when one becomes under-collateralized in a messy way.”
A central theme was clarifying that UST, Terra’s algorithmic stablecoin, and USDT, Tether’s collateralized stablecoin, are not the same thing or related in any way. Many individuals and media organizations seemingly confused the two.
Adam Back sought to clear up the confusion once and for all: “UST is US-Terra, completely unrelated to USDT, the Tether stablecoin.”
Tether CTO Paolo Ardoino explained further: “We have seen a lot of speculation and likely the same party–or someone that took really immediately the same idea–tried to break Tether, but again, there is a D and the D stands for different, so UST is different than USDT.”
VanEck Director Gabor Gurbacs also added that with Tether and USDT, “If you go to the Tether website you can see that what's backing the asset is cash equivalents and short term portfolios that are easy to liquidate at massive sizes. Hundreds of billions of dollars can be liquidated very quickly without significant market impact. That is not the case with algorithmic stablecoins that are linked to another cryptocurrency, for instance.”
When discussing the real-world use cases of Terra’s UST versus Tether’s USDT, Samson Mow noted: “I think it's important that that differentiator is made known because UST/Terra is born of the DeFi Web3 narrative where you're getting crazy APYs and you're just staking various things to earn more of these unstable things. But for Tether it's really used as money, so people use it in the global South. They use it in Latin America. In Asia it's used a lot in cross-country cross-border trade. In Dubai they use Tether to buy houses there. Most real estate companies accept dollars by bank wire or USDT. So there's a real use case behind Tether and that's missing from some of these other projects and I think that's where people should focus their attention.”
None of the speakers seemed surprised at the events unfolding for Terra’s UST. Adam Back explained the high-level scenario and warned against fractional reserves: “Let's assume that some of the investors took out a multiple of what they put in early. Now the system's even more fractional, but you know, while it's growing, the price of LUNA is going up. People buy it, they speculate, it looks good, right? They're making money. It's going up and they use some of the LUNA to actually reduce the interest rates artificially, so create a bit of a Ponzi where they use some of the increased LUNA value to pay the yield farming platform to increase the interest rate to 20%–where it would naturally be lower–to incentivize more people to come in. So it's the kind of thing that looks fun until the music stops and then there aren’t enough chairs; the musical chairs problem.”
Samson Mow summarized Terra’s collapse succinctly: “It was bound to implode eventually and I think it just happened in a much more spectacular manner than most people expected.”
Speakers for the Twitter Spaces include: CEO of JAN3 Samson Mow, CTO of Tether and Bitfinex Paolo Ardoino, Cofounder and CEO of Blockstream Adam Back, and Director at VanEck Gabor Gurbacs. The discussion was moderated by Stokr cofounder Arnab Naskar.