The False Promises of Terra-Luna

This article examens the features of algorithmic stablecoins by differentiating those like Terra-Luna, whose reference asset has an endogenous value, from those for which the price of this asset is exogenous and independent of the protocol that has been set up. With a simple model of the process, we show that the system adopted for Terra-Luna is akin to a Ponzi scheme, since the promise of returns on investments made is impossible to keep. However, if this “false promise” is corrected, an algorithmic stablecoin can provide its owners with greater stability than does Bitcoin, for example, which makes it more attractive. It nevertheless remains a very risky asset, whose long-term stability cannot be guaranteed, even in the absence of a speculative attack.