- Hardcore DeFi believers haven’t completely given up on algorithmic stablecoins, despite the spectacular crash of TerraUSD and its sister token LUNA.
- As the DeFi space became more crowded, each new and shiny borrowing and lending platform had to one up the last one, offering more returns to attract investors.
Despite repeatedly laying out the cards to explain how the unholy trinity of TerraUSD – LUNA – Anchor Protocol was always (hopefully unintentionally) set up for failure, decentralized finance or DeFi diehards remain undeterred.
Hardcore DeFi believers haven’t completely given up on algorithmic stablecoins, despite the spectacular crash of TerraUSD and its sister token LUNA, going to zero, arguing that they remain key for moving to a world without intermediaries such as banks and brokerages.
DeFi had been one of the fastest growing sectors in crypto over the past several years, with a slew of borrowing and lending applications offering double and triple-digit annual returns, while yields in the staid world of finance were bordering on zero.
Investors (both clued-in and clueless) were naturally drawn to the prospect of what appeared to be risk-free returns that more than bettered the rate of inflation.
But like most other cryptocurrency projects, DeFi depends on attracting enough transaction volume to keep blockchain networks going and during the easy money times when the U.S. Federal Reserve was keeping the liquidity taps flowing, that was never going to be a problem.
As the DeFi space became more crowded, each new and shiny borrowing and lending platform had to one up the last one, offering more returns to attract investors.
But since the U.S. Federal Reserve hiked interest rates last November, and as the pace of tightening has gained to deal with inflation, investors who were willing to take more risks in DeFi for the added yields are now seeing U.S. Treasury yields soar.
The current benchmark 10-year U.S. Treasury yield throws just under 3%, a far cry from Anchor Protocol’s promised 19.75%, but also at a fraction of the risk.
While the real yield on safe securities is still below that of inflation, the implosion of TerraUSD demonstrates why that extra yield doesn’t fully compensate for the considerable risks involved.
The collapse of TerraUSD however hasn’t discouraged new attempts to create an algorithmic stablecoin out of nothing.
Last week Tron, whose founder Justin Sun is famous for paying millions to have lunch with Warren Buffett, launched USDD, another algorithmic stablecoin using an arbitrage mechanism that is more or less the same as what TerraUSD used to maintain its dollar peg.
Not to be outdone, Tron’s USDD is offering a whopping 30% yield for USDD depositors, as a promotional annual yield that is subject to change monthly.
And like TerraUSD, USDD will also be “backed” by a projected raise of US$10 billion through the Tron DAO Reserve, something akin to the Luna Foundation Guard, which is still being investigated by online sleuths trying to determine if the Bitcoin it held was ever really used to support the TerraUSD peg.