Financial commentator Frances Coppola is convinced that algorithmic stablecoins such as TerraUSD (UST) will always be vulnerable to sudden collapses, no matter how much the technology improves.
“They can improve their game theory, they can improve their risk assessment, but I think there will still always be some states of the world that they won’t have thought of,” pointed out Coppola in a discussion with Mike McGlone, senior commodity strategist at Bloomberg.
Terra’s UST stablecoin, which relied on an algorithm to maintain a peg to the U.S. dollar, collapsed last week, sparking turmoil in the crypto markets.
According to McGlone, Terra’s collapse is part of a natural “purge” of the crypto space that happens in every bear market. According to the analyst, the concerns around leading stablecoin Tether (USDT), which briefly lost its peg to the dollar as a result of Terra’s collapse, shouldn’t be overestimated.
As McGlone pointed out, Tether already depegged briefly in April 2019 when the New York state attorney general filed a lawsuit against its sister company, Bitfinex.
“The market said, ‘We don’t care. This is a better way to transact dollars,‘” said McGlone.
Coppola, on the other hand, pointed out that while investors were redeeming Tether en mass amid Terra’s collapse, other stablecoins such as USD Coin (USDC) and Binance USD (BUSD) performed as safe-haven assets, thus proving to be more trusted.
Still, Coppola thinks Tether is unlikely to suffer a collapse similar to the one experienced by Terra, as it is backed by real assets held in its reserves. She pointed out that in the event of a crisis, Tether would be able to avoid a mass bank run by suspending redemptions according to its policy.
According to Coppola, the primary source of systemic risk for the crypto market is not stablecoins but crypto exchanges.
“In the event of a Coinbase failure, a lot of people are potentially going to lose a lot of money,” she said. “It would cause kind of a Lehman moment, if you like, in the crypto space.”