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Comment by ryanSrich | Hacker News Reader

You give me a dollar, I give you a digital currency equivalent. When you need your real USD back, you tell me and I give it to you. That means in an ideal world, you have your stable coins backed 1:1 with real USD.

Of course, this isn’t always the case, and with Tether, there has been much scrutiny over the years that they do not have the USD collateral to back their stablecoin.

Ok, but let’s assume Tether has the USD. Why is it depegging? This is most likely due to sell pressure and Tether’s ability to liquidate their USD holdings. I think Tether has more than enough real USD to deal with the sell pressure we’re seeing now, but the system is having a hard time keeping up.

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How does the sell pressure play out? Is this other people willing to sell for 99 cents, 98 cents on exchanges because Tether can’t fulfil orders fast enough? I assume they are always willing to buy at $1 else it all collapses?

AFAIK, Tether will not convert to USD for you unless you register and have >100k Tether. Therefore, most holders only ability to “cashout” is on exchanges. Obviously, this is problematic.

Compounding with this is that when you move money to exchange you have some USD there. But then to actually trade either you receive some stable coin or have to first trade for one...

Probably applies only to some, but still a real insane thing...

This is an amazing explanation. Thank you!

That explanation is not correct. Algorithmic stablecoins rely on a pairing with another crypto, in UST’s case LUNA. 1 UST can always be swapped to $1 US dollar of LUNA. It is interchangable, so $1 US dollar’s worth of LUNA can also be swapped for 1 UST. Hence, the “algorithmic” in the name. This way traders are always incentivized to keep the price of UST at $1.

There is no collateral requirement. In UST/LUNA’s case they had collateral, mostly in Bitcoin, in the Luna Reserve Guard but their collateral proved insufficient. Some algorithmic stablecoins are entirely uncollateralized.

That's all irrelevant, since Tether is not an algorithmic stablecoin, and they claim to have 1:1 reserves for every USDT.

The parent comment was edited to remove the section on UST after my comment.

I still don’t follow why the second currency is required?

They will always swap a UST for $1 of LUNA so a UST is implicitly worth $1.

LUNA itself doesn’t have anything behind it though apart from concidence. So we have a stablecoin manufactured from a volatile unbacked asset where the market cap can fall arbitrarily low.

I know it failed, but it’s not quite clicking for me what they were even trying?

Ponzis can be very profitable. I think algorithmic stablecoins are stupid too.

The second currency is required for the same reason that three card monte requires three cards.

And if the LUNA/USD market becomes insanely volatile or the liquidity vanishes, the algorithm will fail.

fyi ampleforth is an example of a algorithmic stable that doesn't pair with another crypto. Some algorithmic stablecoins incorporate a rebase mechanism when the price deviates from the peg.

Your explanation is incorrect, please see my reply to the comment under yours. You should edit it so people aren’t misinformed.

I removed the section on Terra. Like I said, I didn’t want to get into complicating the explanation, but point taken on the nature of algorithmic stables as opposed to collateralized one. The point I was trying to make was that Terra actually did have collateral, in the form of BTC.

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