Will The UST Debacle Spell Game Over For Other Algorithmic Stablecoins?

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As the UST issue continues unabated, there are growing concerns regarding algorithmic stablecoins. Although a decentralized peg still makes sense, there is much bias toward such projects. In fact, these three algorithmic projects had seen their market cap drop well before UST went off the deep end. 

DAI (DAI)

The leading algorithmic stablecoin of the Ethereum ecosystem is losing a fair bit of traction. Its market cap, indicative of the circulating supply, has taken quite the beating in the past 30 days. DAI’s market capitalization has decreased from over $9.25 billion to under $7.25 billion, confirming there is far less demand for this asset suddenly. While it is not abnormal to see the supply decrease and increase, DAI notes a flat-out decline. 

Unlike UST, though, it succeeds in sustaining its USD peg with some ease. Moreover, DAI still has a substantial trading volume of over $900 million, confirming the project isn’t dead. However, the growing bias toward algorithmic stablecoins might make things a bit more difficult for these types of projects.

Neutrino USD (USDN)

The Neutrino USD stablecoin is an algorithmic stablecoin backed by cryptocurrency collateral. It, too, tries to remain pegged to the US Dollar, although it isn’t doing too great on that front. It has deviated from its peg as USDN currently trades around $0.88, making it far less appealing for those seeking true stability. Moreover, the asset is very volatile in the past few hours, indicating traders intend to keep pushing the price down.  

Following the price peg issue, Neutrino USD has a market cap decline from just over $1 billion to roughly $815 million. That latter number may drift lower depending on how long it takes to restore the USD peg. It seems likely USDN will drop as low as UST has, though, but one can never be too careful with algorithmic dollar pegs these days. 

Frax (FRAX)

Establishing the first fractional-algorithmic stablecoin system sounds very appealing on paper. Frax is built to enable highly scalable decentralized algorithmic money, partially backed by collateral and partially algorithmic. Depending on the price of FRAX, the ratio between collateral and algorithmic backing may differ, although there are ways to ensure the price never deviates too far from the peg. Even so, FRAX currently trades for $0.985, which is not $1 whatsoever.

Unfortunately, it seems the UST issue affects demand for FRAX. Following the price instability, the currency has seen a tremendous circulation drop. It has gone from $2.7 billion in circulation to $2.36 billion in a month. That may not seem like a significant change, but it is evident traders and investors do not favor algorithmic stablecoins today. 


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