Apr 09, 2021

The Travails Of New Stablecoins

Stablecoins are a staple of the cryptocurrency world. Recently a new generation of algorithmic coins was launched, carrying however a lot more risk than previously thought.

Traditional stablecoins like USDT and USDC are pegged to the dollar - using them means you believe the issuing company has the fiat currency to back it up. This trust was at some point shaky, especially regarding USDT. The new generation of stablecoins aims to replace this trust by creating automatic mechanisms to stabilize itself around the peg.

One such recently launched coin was FEI, with the creators raising $1.3b funds. The coin was supposed to hover around $1, with incentives designed to penalize trades pushing the coin away from the peg. This meant if you sell FEI when the price is below $1, you get penalized. However this meant when the price dropped below $1, no one was willing to sell so there was no real price movement towards the peg.

Another interesting case is RAM - a coin pegged to a basket of commodities. Designed to be antiinflationary, it uses a rebase mechanism, adjusting the supply of RAM on the market to drive price towards the current $1.12 peg. This worked well to bring the price down, however in the last few days in spite of repeated rebases its price hovers far below the peg. It remains to be seen how it will recover.

The losers so far in both cases are early retail adopters, stuck with coins which lost value. It is however quite surprising to see people buying newly issued stablecoins counting on a profit. A good reminder to always DYOR (Do Your Own Research) before buying cryptocurrency.