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Comment by gadnuk | Hacker News Reader

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.

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