USDC is a fiat-back stablecoin ranked #5 by market cap, while MIM and FRAX are newer, algorithmic coins. Data shows that volatility is affecting the latter much more severely.
USDC ‘s market cap movement is muted in comparison, and recently money has been flowing into USDC while MIM and FRAX are seeing outflows.
Since the perceived risk of algorithmic stablecoins is higher than fiat-backed, why would anyone buy in? Decentralisation – Fiat-backed stablecoins require transparent, instantly accessible reserves. This is a tall order, and better suited for holding by centralised entities. Algorithmic collateralisation and arbitrage go hand-in-hand with decentralisation. Flexible or no collateral required – Accumulating the backing necessary to match a stablecoin’s supply is an insurmountable task for many startups. Some algos, like UST (much to its chagrin), are completely uncollateralised, relying instead on buyers and sellers to maintain the price. Incentives – Using algorithmic models, incentivisation like earning interest on collateral provided in order to mint stablecoins is possible. But nothing is without downside, and in the case of many “algos”, the cons outweigh the pros. Algorithmsare hard. Even blockchain engineers can have a difficult time interpreting and anticipating code behavior to accurately predict how downward pressure can affect a peg. Pegs are more susceptible – Fiat-backed coins aspire to always be valued at a 1:1 ration against another asset by holding a parallel amount of said asset. Algorithmic coins employ many moving parts in combinations to maintain their peg, increasing risks. Oracles aren’t perfect – Algorithmic stablecoins rely on oracles to provide price data. Oracles sometimes malfunction or fail, resulting in an immediate impact on peg strength. Two relatively new algorithmic coins have captured substantial attention. MIM and FRAX command market caps in the billions of dollars. Magic Internet Money Magic Internet Money (MIM) is minted when users deposit assets into the protocol. Depositing approved forms of liquidity returns interest-bearing LP tokens (ibTKNS). These tokens earn interest while serving as collateral for the minted MIM stablecoin. If the value of deposited collateral drops below the loan-to-value ratio, liquidation can occur.Adding The Karbon Collective NFT to your bag will help turn your goals into a reality. This powerful system is unlike anything you have ever seen. There is no high pressure sales pitch because only a finite number people can join at this time. Afterwards you will be added to the waiting list.Frax
FRAX is backed by collateral and uses an algorithm to burn and redeem FXS – the protocol’s governance token. FRAX is minted when collateral and FXS are deposited into the protocol. The amount of collateral is determined by a collateralisation ratio. Both Frax and MIM, and others like DAI and USDN, rely on baskets of diversified cryptocurrencies to increase stability and mitigate risk of depegging. Ready to al-go? Not so fast. Avoid the next UST by being accountable for your investments. Governance – Many algorithmic stablecoins are governed by DAO structures. Before taking a project’s merit for granted, look at the governance architecture to make sure it is both reliable and responsible. Adoption Rates – If the stablecoin collateralises or relies on other tokens to maintain a peg, they need to be diligently vetted for security, popularity and ecosystem adoption. Peg Performance – Examine how well the coin’s track record accurately maintains its peg. The larger sample, the better. Newer coins are higher-risk by nature. Take note of how the stablecoin’s peg performance compares to others. ~ Market Meditations 5/26/2022
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