The TerraUST crash was bad. But ask yourself. Are you prepared to live in a world where your Government and Private banks can deny you access to your own money at a whim? That’s quite a conundrum, right?
Over the last 2 years, algorithmic stablecoins have come in for massive criticism worldwide for their apparent lack of reliability, and multiple cases of de-peg. It finally reached a tipping point in May 2022, when the Terra UST stablecoin lost its peg to the US dollar — causing unprecedented losses, in excess of $40bn for stablecoin holders, Web3 users, and Decentralized Finance (DeFi) investors around the world.
Many critics predicted that the TerraUST crash would effectively mark the death of algorithmic stablecoins. But today, nearly 6months after, recent events in global finance and the blockchain space are beginning to show us exactly why algorithmic stablecoins are indispensable to the successful establishment of a truly decentralized web3 economy.
In this article you will learn all about the following;
- The existential threats posed by Financial Censorship
- De-peg Risks and other Criticisms of Algorithmic Stablecoins
- How InsurAce.io helps to protect the web3 economy from the De-Peg Risks
- The Future of Algorithmic Stablecoins in the web3 economy
Now, let’s get straight to business.
Algorithm Stablecoins vs Financial Censorship
Financial Censorship is a situation where government regulators, financial institutions or payment intermediaries unilaterally shut down accounts or inhibit a private individual or corporate entity from carrying out financial transactions and accessing specific financial services.
The history of Financial Censorship dates back to 2010, when whistleblower website WikiLeaks suffered financial blockade spurred on by unofficial government pressure, even though the website had not been charged with any crime in the United States at the time.
Since then, there have been numerous other cases of companies and individuals around the world that have seen their ability to receive payments and have basic banking services shut down as a way to silence them, or compel compliance whether legally or otherwise.
In recent years , we have seen other high-profile cases of financial Censorship that have rocked some of the major players in the Web3 economy.
In August 2019, Barclays Bank unilaterally discontinued banking services to Coinbase in the UK. Coinbase is a sister company to Circle — the issuer of centralized stablecoin USDC.
“We need to sit down and ask, what do they want, what are they waiting for?”
Coinbase UK Chief Executive Zeeshan Feroz lamented as the company struggled to come to grips with the abrupt service disruptions, user dissatisfaction, and bad press caused by the ill-fated announcement.
The banking service disruptions resulted in a sharp downturn in Coinbase’s revenue. In a 2019 filing with the U.K.’s business registrar, Coinbase UK reported a turnover of $114.9 million, showing an astonishing 38% drop from $185.6 million recorded in 2018.
In June 2021, the Binance also fell victim to abrupt service restrictions by banks. The BUSD stablecoin issuer ecosystem was shocked when Crypto-friendly Silvergate Bank suddenly announced that it would immediately halt the provision of banking services to Binance.
This meant that, briefly, Binance users could no longer be able to deposit and withdraw USD via Silvergate.
It’s 2022 today, and not much has changed. The big banks and governments remain poised to throw spanners into the plumbing behind the issuance and management of Centralized stablecoins.
- US-Treasury OFAC Sanctions on Tornado Cash
The recent campaigns by the US Treasury to blacklist dozens of individuals and corporate entities under the OFAC sanctions list is the latest reminder that the world desperately needs a permissionless and neutral financial system.
Things got quite worrisome as the sanctions quickly revealed how tightly tethered the Web3 economy still is to the TradFi regulators.
In the aftermath of the Tornado Cash sanctions, Circle quickly announced that it had Frozen USDC funds that were affiliated with the embattled Cash mixers.
This drew outrage from many experts in the Web 3 economy who argued that Centralized Stablecoins harbored a central point of weakness for Governments & Regulators to dictate what happens in the decentralized finance world which is antithetical to the creation of a decentralized, independent web3 economy.
Dangers Posed By Financial Censorship & TradFi Sanctions
When financial institutions and payment intermediaries shut down accounts or inhibit transactions, it can have serious ramifications for free speech and democratic principles around the world.
Most Centralized Stablecoins, whether they are deployed on DeFi protocols or not, are mandated to hold collateral assets in form of Cash reserves, and regulated-securities, as well as a bank account, which they would rely on to offer Fiat-rail services to their users.
Financial Censorship poses the following risks for the Web3 economy
- Outright Sanctions — governments can outrightly outlaw the operations of a Centralized Stablecoin issuer there halting crucial service.
- Fiat rail inefficiencies — web3 services users can be stopped from accessing crucial financial services on-ramp and off-ramp from centralized stablecoins.
- Liquidity Crunch — disruption in crucial financial services of Centralized stablecoin issuers due to sanctions can cause a liquidity crunch. And if users get spooked, it could lead to a de-peg or serious death spiral.
- Taxes — Centralized stablecoin issuers are often compelled to pay hefty taxes on their reserve asset holdings and this generally leads to inefficient APY outcomes for stablecoin holders.
Between Coinbase, and Binance —we’ve seen examples of regulatory pressure being exerted on Centralized stablecoin issuers in a bid to compel compliance. Here’s how Algorithmic stablecoins can solve this problem.
The Unique Role of Algorithmic Stablecoins in the web3 Economy
Financial censorship is a major concern around the blockchain world today. And Algorithmic Stablecoins can fix this.
Across the board, Algorithmic stablecoins are lauded as censorship resistant. This is because unlike Centralized stablecoins they are not systematically tethered to the TradFi systems, banks and public regulators through their reserve assets, corporate bank accounts, fiat deposits, treasury bills, bonds and other regulated securities, — Algo-stablecoins are instead backed by an auto-balancing sister token or a basket of other non-regulated cryptocurrencies. This level of decentralization makes it nearly impossible for regulators to enforce arbitrary sanctions or limit web3 user’s access to crucial financial services.
The Future of Algorithmic Stablecoins
Following the Circle USDC’s reaction to the US-Treasury OFAC sanctions, MakerDAO Founder, Rune Christensen led the call for a drastic switch to a more decentralized web3 economy. He announced Plans to Sell $3.5Bn USDC (50.1% of its total reserve assets backing.
He called on members of the Decentralized Autonomous Organization to consider switching its USDC backing to Ethereum (ETH) in order to retain the core principle of decentralization and censorship resistance.
When the MakerDAO ecosystem passes this proposal, it is expected that over the next few years, many other web3 communities will opt for this solution as an effective way to resist censorship.
Stablecoin De-Peg Risk — the big criticism of Algorithmic Stablecoins
Yes, undoubtedly, algorithmic stablecoin are the most suitable option for decentralization, security and censorship resistance. However, their ability to stay on-peg has constantly come under scrutiny over the last few years. From Iron Finance in 2021, to TerraUST in May 2022, it is an undeniable fact that the majority of Stablecoin tokens that lose their peg every year are decentralized, algorithmic ones.
So, before the big switch towards decentralization can be made, the web3 economy has to figure out an effective solution to provide a safety net to help users of web3-based financial services mitigate the risk of losses of stablecoin de-peg — and this is where InsurAce.io comes in.
Protecting Yourself From Stablecoin De-Peg Risks With Web3 Insurance
A stablecoin de-peg event is an unfortunate and unforeseen occurrence where the market price of a stablecoin falls significantly below its $1 peg.
Generally speaking, stablecoins may de-peg due to various reasons such as DeFi exploits, liquidity issues, proprietary trading on the part of the issuer(s), adverse market movements in the collateral assets, or smart contract vulnerability in the case of algorithmic stablecoins.
Getting Stablecoin De-Peg Cover with InsurAce.io
InsurAce.io currently offers a robust Stablecoin De-peg Cover products including the Magic Internet Money – an algorithmic stablecoin issued by the decentralized abracadabra.money community.
- MIM De-peg Cover
- BUSD De-peg Cover
- USDT De-peg Cover
- USDC De-peg Cover
You can proceed to read InsurAce’s updated Stablecoin De-peg Cover wording here.
With competitive prices and attractive returns for underwriters, InsurAce has established its position as a leading Web3 Insurance cover provider. Most notably, during the TerraUST crash in May 2022, InsurAce bailed out over 150 victims with around $11.7 million in payouts, settling the entire claim process within just 2 weeks of the de-peg event.
And more recently, InsurAce has further expanded its Stablecoin Cover protection to the 10 million+ USDC holders globally.