4 Reasons You Can Trust an Algorithmic Stablecoin
Reading Time: 4 minutesWhile algorithmic stablecoins are controversial, there are several reasons you can trust them.
Stablecoins carve out an interesting niche in the crypto industry because they’re capable of maintaining a fairly steady value. But stablecoins are not all one and the same. There are various kinds of stablecoin out there, including a type known as algorithmic.
So, what is an algorithmic stablecoin, and why should you trust them?
What Is an Algorithmic Stablecoin?
Many stablecoins are backed by a tangible asset, such as the US dollar, gold, or a similar form of collateral (such as USD Coin and Tether Gold). It provides a layer of security for investors in the event of a price crash. Algorithmic stablecoins, on the other hand, do not have any backing and are not fully collateralized. So what makes them stable?
As the name suggests, an algorithmic stablecoin is a cryptocurrency that uses a computer algorithm to maintain value. Computer algorithms are sequences of instructions a device carries out to perform a certain function. In the case of stablecoins, the algorithm is designed to maintain value using the relationship between a pair of coins.
One of the most well-known algorithmic stablecoins was TerraUSD, which was paired with Terra Luna, a regular cryptocurrency. USTC and LUNA had a mint/burn relationship, wherein one asset was burned or minted to maintain the value of the other. However, in May 2022, these two assets crashed catastrophically. As a result, TerraUSD no longer exists, while the Terra Luna blockchain underwent a hard fork to give way to LUNA 2.0.
Stablecoins are a little unusual and pose certain risks, so it’s hard to know whether they’re a good investment option. So, what about algorithmic stablecoins makes them trustworthy?
4 Reasons You Should Trust Algorithmic Stablecoins
1. Heightened Stability Over Typical Cryptos
The first and likely most obvious reason to trust algorithmic stablecoins is that they can provide a much higher level of stability than traditional cryptos, like Bitcoin, Ethereum, and Dogecoin. Many investors have difficulty justifying crypto purchases for the sole reason that most of these assets have little to no stability. We’ve seen Bitcoin rise to highs of almost $70,000 and then fall to below $20,000, so it’s evident that cryptocurrency is by no means a sure thing in terms of value.
If you want to invest in cryptocurrency because you see it as a legitimate asset with similar utility to traditional cash, investing in an algorithmic stablecoin might be a solid option for you. But it’s worth noting that there are other kinds of stablecoin out there, so you might want to also consider these before making any purchases.
On the other hand, if you’re into the buy-low-sell-high element of crypto investing, stablecoins likely aren’t for you, as they’re designed to maintain a steady value.
2. Transparent and Auditable Code
Algorithms require code to function. So, it’s no surprise that algorithmic stablecoins come with a code set used to maintain price. If an algorithmic stablecoin is original, the developers will write their own code for the price-maintaining mechanism. But how do you know if this algorithm is any good? Is it littered with flaws?
This is an important factor to consider when you’re looking at investing in an algorithmic stablecoin. But worry not! All legitimate algorithmic stablecoin developers will release a copy of their code for you to look at.
Take Frax, for example. This algorithmic stablecoin is open source, meaning anyone can look at the code used to maintain a steady value. Most algorithmic stablecoins are also routinely audited by professionals to ensure legitimacy. So, if you’re not well-versed in coding, you can check out the audit reports of your chosen stablecoin to see how well it performed under the microscope.
In fact, most cryptocurrencies out there today, be they typical assets or stablecoins, are open source, so you can check out the underlying code of a given crypto protocol to determine if it’s safe and trustworthy.
3. Decentralized Structure
Decentralization is a big deal in the crypto industry, though it is not a core element. Some crypto platforms are centralized, while others are decentralized. Binance, Coinbase, and Kraken, for example, are centralized, while Uniswap, PancakeSwap, and OpenOcean, are decentralized. Depending on your preferences, you may opt for centralized over decentralized or vice versa.
For those who prefer decentralization, algorithmic stablecoins could provide a solid investment avenue. This is because all algorithmic stablecoins are decentralized by nature, so no one entity holds all the power or data existing within the network. Instead, data and power is spread across connection points, or nodes, allowing for a fair and even distribution that lowers the chance of technical crashes and malicious takeovers.
What’s more, if you use an algorithmic stablecoin, you won’t have to deal with any middlemen or third parties when you conduct transactions.
4. Option of Governance for Users
A big advantage of decentralized platforms is that they employ a protocol known as governance. Governance is the process by which token holders can vote on network changes. Usually, the more tokens you’re holding, the more voting power you receive.
On centralized platforms, this isn’t the case. Take Instagram, for example. Do you get a say in the changes made to this outlet? Unless you’re a higher-up in the Meta team, likely not. But if you’re using a decentralized platform, you can hold governance tokens and have your say in how the ecosystem progresses. For example, you may be able to vote on a software update, the addition of a new feature, or the removal of a problematic one.
All of the biggest algorithmic stablecoins, including Frax, Dai, and Ampleforth, all mint governance tokens for their users to purchase. So, if you’d like to participate in the network of the algorithmic stablecoin you purchase, you can easily do so! Make sure you stay updated on when these networks open their voting windows for governance if you want to get involved.
Algorithmic Stablecoins Have Many Perks
There are many perks associated with algorithmic stablecoins. These assets can provide a steady price and transparent code while maintaining a decentralized model, which is a big plus to many. Though these cryptocurrencies are, therefore, still exposed to crashes, the added layer of assurance they provide their investors is undeniable.
Reference: https://www.makeuseof.com/reasons-trust-algorithmic-stablecoin/
Ref: makeuseof
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