The Rise and Fall of Stablecoins: A Look at Failed Stablecoin Projects

SNEAK PEEK:

• Stablecoins were created to address the volatility of cryptocurrencies.
• Centralized stablecoins like Tether and USD Coin have maintained their stability, while fully decentralized stablecoins seem to be more prone to failure.
• The entire 24-hour volume of all stablecoins is currently $50.90B.

Stablecoins were initially marketed as a way to address the volatility of cryptocurrencies, but recent years have seen the rise of several failed stablecoin projects. While centralized stablecoins like Tether, USD Coin, Binance USD, Dai, and Frax have managed to maintain their stability, their decentralized counterparts have been less successful.

One of the first decentralized stablecoin projects to fail was Basis Cash in January 2021. The project’s seigniorage algorithmic stablecoin, composed of two tokens, a stablecoin, and a free-to-move token, failed due to its mechanism, which led to the collapse of the project.

3/ Basis Cash was one of the first decentralized stablecoin projects that failed in January 2021.

It was Do Kwon’s first attempt at engineering a stablecoin model, and he would go on to found UST later in the year.

— CoinGecko (@coingecko) March 2, 2023

Similarly, Empty Set Dollar and Dynamic Set Dollar also failed, and Iron Finance collapsed in June 2021 due to a bank run caused by large redemptions of its stablecoin to USDC. The Terra LUNA project, with a market cap of $18.78B, required significant amounts of capital to prop it up during a depegging event, but sell-offs ultimately resulted in a death spiral of LUNA, and UST was permanently depegged.

According to a statistic carried out by CoinGecko, Fei USD is the recent stablecoin that shuttered its operations in August 2022 due to mounting technical, financial, and future regulatory risks, and its holders were required to redeem their FEI for DAI.

These failed projects serve as a reminder of the risks associated with stablecoin investments. Fully decentralized stablecoins, in particular, seem to be more prone to failure than their centralized counterparts. However, even centralized stablecoins have their risks, as seen in the recent regulatory crackdown on Tether.

According to CoinMarketCap, the entire 24-hour volume of all stablecoins is currently $50.90B, accounting for 91.73% of the overall crypto market volume.

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• Source: https://investorbites.com/the-rise-and-fall-of-stablecoins-a-look-at-failed-stablecoin-projects/