Algorithmic stablecoins are the new hype in the crypto industry. The collapse of terra's UST, struck the community by surprise. That's when the question of integrity and sustainability of the stablecoin market in general, quickly grew in popularity. But what is it? Is it safe and can it be sustainable? This article will cover all common and major questions related to the world of stablecoins.

What is a stablecoin?

A stablecoin is a cryptocurrency that claims to hold it's value to a peg. There are numerous attempts to achieve this and multiple strategies were employed over time. However, most of these self-proclaimed stable coins failed. The reason for their failure depended largely on the project at hand. For instance, similarly to bDollar, UST's collapse was due to over-inflating (printing) and not having enough reserves in the bank. Both projects suffered extremely similar fates, once the peg broke, the currencies rapidly fell in price.

This led to the question, is it really possible to create safe stablecoins? Unfortunately, the answer is no. The truth is, for a decentralized dollar to exist, would mean a dollar that's traded openly and freely on the market. As such, if large amounts of money (proportional to what is owned) were to flow in or out of the system, the system can de-peg really quickly. However, if the stablecoin and it's funds are properly managed, the price drop can be supported and brought back to a dollar.

So why did I say no? Because you'll never have a stable coin that will always be 100% pegged. There will always be minor shifts in the price and on bad days it could even lead to temporary drops or pumps.

Are stablecoins safe?

We recommend staying away from most stablecoins. There are few exceptions that we would consider safe based on legal compliance, their team and transparency. The issue with the stablecoin is that you virtually own the asset. Therefore, you have to trust a third party to own and hold an asset for you. Often, the problem arrises when the company does not indeed own what they claim to own.

If you're looking for the most widely adopted USD stablecoin, look no further than Tether. It is trusted with over 69bn$. That being said, tether has constantly been questioned and is constantly under legal pressure to comply with regulations. Therefore, Binance and Paxos collectively launched the BUSD stablecoin. We recommend doing your own research as to which company you choose to trust.

Ultimately, we would claim the stablecoin to be possible in theory, but hard to implement practically. We also believe that the company behind the stablecoin is extremely important to verify it's safety. It's always a good idea to diversify your risk and not have it all in one stablecoin.

Conclusion

In conclusion, we believe the stablecoin can be safe depending on the company that's running it. We also believe that the economics behind the stablecoin are extremely important. Furthermore, diversifying your risk into multiple companies is always better than having it all hedged in one. Finally, it's extremely important to do your own research, particularly on the stablecoin you wish to invest in. One piece of advice, if it seems to good to be true, it probably is.

As always, DYOR and resh out!