After the collapse of Terraform Labs' cryptocurrency Terra (LUNA) and its stablecoin Terra (UST), the notion of "algorithmic stabilization" has fallen to a low point in popularity, both in the cryptocurrency world and among the main observers.
This emotional response, however, is strongly at odds with reality. In fact, algorithmic stabilization of digital assets is a very valuable and important class of mechanism whose proper deployment will be critical if the crypto sphere meets its long-term goal of improving the mainstream financial system.
Blockchains and other similar data structures for secure decentralized computing networks are not just about money. Due to the historical roots of blockchain technology in Bitcoin (BTC), however, the issue of blockchain-based digital money is deeply embedded in the ecosystem. Since its inception, a central aspiration of the blockchain space has been the creation of cryptocurrencies that can serve as a means of payment and repository of value, independent of the "fiat currencies" created, championed, and manipulated by national governments.
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However, until now, the world of cryptocurrencies has failed miserably in fulfilling its original aspiration to produce tokens that are superior to fiat currency for payment or store of value.
Indeed, this aspiration is eminently achievable, but achieving it in a manageable way requires the creative use of algorithmic stabilization, the same type of mechanism that LUNA and other Ponzi-style projects have abused and thus unfairly given a reputation for. bad.
Almost all of the crypto tokens in existence today disqualify themselves as broadly useful tools for payment or value storage for multiple reasons: they are too slow and expensive to transact, and their exchange values โโare too volatile.
The "slow and expensive" problem is gradually being addressed through improvements to the underlying technology.
The volatility problem is not directly due to technological deficiencies, but rather to market dynamics. Crypto markets are not that large relative to the size of global financial systems, and are heavily traded by speculators, causing exchange rates to swing violently up and down.
The best solutions the cryptocurrency world has found to this volatility problem so far are โstablecoins,โ which are cryptocurrencies with values โโpegged to fiat currencies like the US dollar or the Euro. But fundamentally better solutions can be found that avoid any dependency on fiat and provide other advantages by using algorithmic stabilization judiciously (and not corruptly).
Problems with stablecoins
Stable coins like Tether (USDT), BinanceUSD (BUSD) and USD Coin (USDC) have values โโpegged to the US dollar, which means they can be used as a store of value almost as reliably as an ordinary bank account. For people who already do business in the world of cryptocurrencies, it is useful to have wealth stored in a stable form within one's crypto wallet, so one can easily switch it between the stable form and various other crypto products.
The largest and most popular stablecoins are โfully backedโ, which means, for example, that each USDC dollar-equivalent unit corresponds to one US dollar stored in the treasury of the organization backing USDC. So if everyone with a USDC unit applied to exchange it for USD at the same time, the organization could quickly fulfill all the requests.
Some stablecoins are fractionally backed, which means that if, for example, $100 million worth of stablecoins has been issued, there may only be $70 million in the corresponding treasury backing it. In that case, if 70% of stablecoin holders redeemed their tokens, things would be fine. But if 80% were to redeem their tokens, it would become a problem. For FRAX and other similar stablecoins, algorithmic stabilization methods are used to "hold peg". That is, to make sure that the exchange value of the stablecoin stays very close to that of the USD parity.
Terra's UST was an example of a stablecoin whose backing pool largely consisted of tokens created by the people behind LUNA as governance tokens for their platform, rather than USD or even cryptocurrencies like BTC or Ether (ETH) defined independently of LUNA. When LUNA started to destabilize, the perceived value of their governance token decreased, which meant that the cash value of their reserves decreased, leading to further destabilization, etc.
While LUNA used algorithmic stabilization, the core problem with their setup wasn't this: it was the presence of vicious circularities in their tokenomics, such as using their own governance token as a backing pool. Like most other flexible financial mechanisms, algorithmic stabilization can be manipulated.
All major governments are explicitly targeting stablecoins in their current regulatory exercises, with the goal of crafting strict regulations on the issuance and properties of any crypto tokens that seek to match the value of fiat currency.
The answer to all of these problems is relatively simple: use the flexibility of blockchain-based smart contract infrastructure to create new financial instruments that achieve useful forms of stability without being tied to fiat.
Liberating algorithmic stabilization
"Stability" does not inherently mean correlation to the value of the fiat currency. What a token should be stable is that, year after year, it should cost roughly the same number of tokens to buy the same number of things: carrots, chickens, fencing material, rare earths, accounting services, you name it. .
This leads to what my colleagues in the Cogito project are doing, with new tokens that they call "tracercoins", which are actually stablecoins but of a different type, pegged at roughly different amounts than fiat currencies. For example, the Cogito G coin is pegged to a synthetic index that measures progress in improving the environment (for example, global temperature).
Tracercoins can be programmed to track transactions in any manner required by law in the jurisdictions where they are used. But they're not trying to emulate the currency of any particular country, so they're probably not as tightly regulated as fiats. stablecoins.
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Because the pegs for these tokens are synthetic, it is a less traumatic market psychology problem if the tokens vary a bit from their pegs from time to time.
So what we have here are stores of value that are potentially better than even the US dollar and other traditional financial assets, in terms of holding fundamental value as the world evolvesโฆ and that are much less volatile than BTC and other standard crypto assets. due to the stabilization built into its tokenomics.
Along with modern blockchain efficiency optimizations, we also have a viable payment mechanism that is not tied to any country's currency.
Crypto has the potential to fulfill its ambitious long-term aspirations, including creating financial tokens that serve as better stores of value and payment mechanisms than fiat currencies.
To realize this potential, the community must put aside the fears borne by the various frauds, scams, and poorly designed systems that have plagued the cryptocurrency world, and aggressively deploy the best tools available, such as algorithmic stabilization based on fractional reserve, in the service of creative designs aimed at the common good.
ben goertzel is the CEO and founder of SingularityNET. He previously served as research director at the Machine Intelligence Research Institute, as chief scientist and president of the artificial intelligence software company Novamente LLC, and as president of the OpenCog Foundation. He graduated from Temple University with a Ph.D. in mathematics.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
