Ethereum ETH/USD co-creator Vitalik Buterin and FTX CEO Sam Bankman-Fried hinted at the troubles the stablecoin Terra USD UST/USD is facing in light of losing its peg to the dollar.
What Happened: A video of Buterin purportedly from three weeks ago was shared by Bankless on Twitter on Tuesday.
In the video, Buterin addresses certain stablecoins and said, “There’s also other projects doing insanely risky undercollateralized, barely collateralized sort of stuff.”
They are “trying to market themselves on how optimal they are but without really caring about how fat their fat tails are.”
Buterin said the “biggest fallacy” that people, especially newbies, have in terms of judging stablecoins is focusing on the price and focusing on the range between $0.99 and $1.01.
That mindset is “very wrong” because that is largely a function of a market maker and “anyone can hire a good market maker for a short period of time,” said Buterin.
In a transcript, published by Bloomberg on April 26, Bankman-Fried touched on algorithmic or partially algorithmic partially backed stablecoins.
Bloomberg’s digital news executive editor, Joe Weisenthal, compared such coins to a perpetual motion machine and asked if there can be truly a decentralized stablecoin. Notably, Weisenthal referred to Luna and UST in his question.
“I do have some sympathy [for] the perpetual motion machine crowd here,” said Bankman-Fried.
“They can serve some useful purposes, but if you do zoom out ... and you say, this is a stable coin, backed by volatile assets, what's gonna happen in a big market move? You know how this plays out.”
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Why It Matters: UST has lost its peg to the dollar several times recently. On-chain data, noted by Benzinga in a recent report, indicates that Terra’s $1.3 billion Bitcoin BTC/USD reserves were drained entirely in defending the peg.
Buterin said DAI (DAI), Rai Reflex Index (RAI) and USD Coin (USDC) are the only three stablecoins “that we really need” in the video.
Both DAI and RAI are Ethereum-based. USDC’s two founding members include Circle and Coinbase Global, Inc COIN.
At press time, UST traded 8.05% higher over 24 hours at $0.83. USDC was at $0.9998, DAI at $0.9992, and RAI at $3.
On Tuesday, cryptocurrency trader Michaël van de Poppe said that the fact that the UST peg was still not restored is a reason Bitcoin is not bouncing back faster.
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