In my latest video we talk about algorithmic stable coins and their potential risks in the crypto world and how that may have an effect on DEC - Splinterlands stable coin.
-ALGORITHMIC STABLE COINS-
So, stablecoins are cryptocurrencies that are supposed to be pegged to fiat currencies like the US dollar. The two biggest ones, tether's (USDT) and Circle's (USDC) coin, are “over-collateralized” by fiat reserves, meaning they have cash or cash-equivalent assets in their reserves. Each USDT or USDC traded in the crypto market is backed by what’s actually in the possession of the stablecoin issuers. Because of this, they can be easily exchanged for cash or highly liquid cash equivalents.
In contrast, algorithmic stablecoins rely on instructions coded into the token and active treasury management to hold their value. UST, which operated in tandem with Luna, was the most popular and controversial of these type of tokens.
Regardless though, like their "traditional" counterparts, algorithmic stable coins are intended to provide calm amid the chaos in the crypto world, but it has been proven recently that they can also serve as lightning rods in volatile markets. The recent incident of UST losing its dollar peg has sent shockwaves throughout the crypto market as it has exposed the weakness' of algorithm stable coins.
-THE PERFECT STORM-
When all of the non-asset based mechanisms that gave LUNA & UST their value broke down, UST lost its dollar peg. Along with the sum of a number of illfated circumstances this created a perfect storm for a black swan event. LUNA’s price was under pressure, so UST holders feared that the UST peg was at risk and decided to redeem their UST positions. In doing so, UST was burnt and LUNA was minted and sold on the market. This exacerbated further decline of LUNA’s price creating hyperinflation whilst additionally pushing more UST holders to sell their UST. Furthermore, a large drop in the total market cap of crypto at the time created further selling pressure. As the price of LUNA fell, this also triggered liquidations of LUNA collateral positions on defi platforms. And if that wasn't bad enough, because of the panic and network congestion, users had the inability to access wallets to deposit funds to decrease their loan-to-value (LTV) ratios, forcing even further liquidations. The demand for Terra's stablecoins flatlined as a result and huge losses materalized.
-THE DEC DIFFERENCE-
Thankfully, Unlike TERRA'S UST, DEC is backed by actual assets and Matt was quick to announce that the purchasing of potions and chaos legion boosters will be reintroduced to the Splinterlands shop using DEC tokens at a fixed rate of 1000 DEC per $1 USD. In turn, this could have a tremendous effect on the sale of the remaining Chaos Legion packs, because if DEC drops below the peg price, purchasers would essentially be getting Chaos Legion packs heavily discounted.
Right now, and unlike TERRA's UST, it's actually beneficial for DEC to be below peg for 2 key reasons:
The first, - If DEC is below peg, as mentioned, this means that Chaos Legion boosters will be essentially discounted, as 4000 DEC regardless of it's cost to purchase or it's current value, will be redeemable for a Chaos Legion pack because of it's fixed dollar value.
The second reason is that, if users wished to purchase a ton of DEC right now to benefit from the remaining 70 odd days available to them for the SPS air drop they could do this and not even worry about whether the price of DEC see's further decline. Because In this scenario, even if DEC did drop futher, at the end of the SPS airdrop period, the DEC would still have a fixed value of 1000 DEC to $1 USD, and at that time the user could simply purchase Chaos Legion packs with their DEC regardless of DEC's value and still receive their fixed DEC to dollar value. This would allow users to accumulate and enjoy the remainder of the free SPS airdrops period, without having to worry about DEC's future value.
As we saw with the Terra ecosystems death spiral, there is inherent danger with algorithmic stables that are essentially backed by nothing. However, the idea of backing a stable coin with capital generating assets like how Splinterlands is demonstrating, is not only genius, but also could be the critical component needed for successful algorithmic stable coins. This kind of innovation is one of many reason why the Play 2 Earn space has such a promising future.
And that's it for me for now guys, please hit the like and subscribe button if you enjoyed my content. Jump in my community discord channel which is in the video description below to participate in my ongoing Splinterlands giveaways, but other than that, I will see you on the blockchain.
▶️ 3Speak
