The head of the International Monetary Fund called algorithmic stablecoins a pyramid scheme.
The collapse of TerraUSD and LUNA continues to send shockwaves through the crypto market. As we have previously reported:
In May 2022, TerraUSD fell to a low of 15 cents. Although it was pegged to the US dollar based on a complex algorithmic relationship with its sister currency LUNA, both coins came under pressure and collapsed. As a result of the de-pegging of UST, LUNA fell below a penny. LUNA had reached an all-time high of $119 as recently as April 5, 2022. A month later, the coin was virtually worthless.
Now algorithmic stablecoins – which are not backed by a reserve currency, such as the US dollar – are drawing the attention of the International Monetary Fund.
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During a panel moderated at the World Economic Forum on Monday, Kristalina Georgieva, the managing director of the IMF, did not hold back in her remarks:
When we look at stablecoins this is the area where the big mess happened. If a stablecoin is backed with assets, one to one, it is stable. When it is not backed with assets, but it is promised to deliver 20% return, it’s a pyramid. What happens to pyramids? … They eventually fall to pieces.
The failure of TerraUSD and LUNA wiped out billions of dollars from the crypto market and left retail investors holding the bag; many institutional investors cashed out LUNA near its all-time high, profiting handsomely shortly before smaller investors lost their life savings.
Amazingly, the creators behind TerraUSD and LUNA are promoting a new Terra blockchain (i.e. Terra 2.0).