Algorithmic stablecoin unveils new ways to preserve its peg to US dollar

UST's dramatic collapse sent shockwaves through the crypto markets — and led to probing questions on whether algorithmic stablecoins can, and should, have a place in the world of DeFi.

But now, one project says it is tackling the major issues that have led to these digital assets to fail in "violent, public events" — causing selloffs to the tune of billions of dollars and decimating the life savings of countless investors.

The Balance Ecosystem brings together a suite of products that aim to ensure algorithmic stablecoins can be used in a safer way. The supply of USDB is said to be heavily controlled in order to avoid a “depeg” from the U.S. dollar. If you recall, much of UST's woes began when the value of this digital asset fell below $1 — subsequently causing a bank run on LUNA, its sister token.

Those behind the project say they are working slowly and carefully to ensure testing of USDB's resiliency takes place on a small scale. It's hoped these stress tests will iron out weaknesses in the system and enhance robustness by the time this algorithmic stablecoin is used more widely by consumers.

Leaders also stress that USDB will not be paired with FHM, another cryptocurrency within the ecosystem — nor will this algorithmic stablecoin be built solely on a treasury of value-storing assets, a technique that's commonly used by rivals.

The crypto markets are volatile right now, and a blend of geopolitical tensions and economic uncertainty has meant these fluctuations are being replicated across a number of asset classes. Overall, the goal is simple: to ensure the Balance Ecosystem's core tokens thrive even when real-world economics are factored in.

Preserving the peg

In a recent Medium article, those involved in Fantohm explained how they're working to ensure USDB can "keep hard-earned money safe and secure in the DeFi space."

USDB's treasury uses a combination of decentralized assets for censorship-resistant backing — and, crucially, their liquidity means they can be sold with ease if the algorithmic stablecoin's peg needs to be restored as a matter of urgency.

Another mechanism means that liquidity providers "cannot manipulate or cause significant shifts in price," — and the project argues that "protocol-owned liquidity" is vital for creating an elastic supply that can be redeemed for $1 at all times. In line with this belief, the trading liquidity of USDB is a Balance Ecosystem-owned asset.

Overall, there are said to be three soon-to-be-released mechanisms to preserve USDB's value — and further mechanisms are under consideration. They include collateralized debt positions, which produce income for peg maintenance; improvements to its supply backing through changes in FHM’s tokenomics; and even backing a portion of USDB with fiat as centralized use cases present themselves.

Acknowledging that the stakes are high, the Balance Ecosystem set out why these precautions are necessary: "A stablecoin's performance and integrity are heavily dependent on how it behaves under stressful conditions, which include not just market volatility but also intentional attacks on its governing protocol. Whenever investors lose confidence in the algorithm, the peg falls, which causes a chain reaction."

Doing things right

Right now, the team says preparations for future use are underway that will ultimately benefit tens of millions of people.

A plethora of partnerships has already been established with the likes of Beethoven-X, Beefy.Fi, Beluga, and Reaper.Farm.

As a spokesperson added, "The Balance Organization is succeeding where other algorithmic stablecoin makers have failed because they are dedicated to moving slowly, regardless of market interest or disinterest."

USDB recently received a privacy upgrade through a "revolutionary solution" known as Incognito. This approach effectively aims to give established coins an "incognito mode," like the one seen on Google Chrome, without attempting to launch a new cryptocurrency that boasts privacy-preserving features.

As the dust continues to settle from Terra's demise, projects like the Balance Ecosystem are hoping to learn from this doomed blockchain's painful lessons — and do right by their users.