Post-Terra/LUNA collapse, algorithmic stablecoins are controversial. 
The $40 billion Terra/UST death spiral in May 2022 shook DeFi to its core. But innovation continues. Let’s discuss: can algorithmic stablecoins work, or are they fundamentally flawed?
The Terra/UST Collapse Recap
What happened:
- UST was “backed” by LUNA via arbitrage mechanism
- Bank run started when UST lost peg
- LUNA hyperinflated (printed trillions to restore peg)
- Both went to zero in days
- $40B+ wiped out
Why it failed:
- No real backing (just algorithmic promise)
- Death spiral: depeg → LUNA print → LUNA dump → worse depeg
- Anchor Protocol offering 20% APY was unsustainable
- Too much faith in algorithms, not enough collateral
The Frax Model: Hybrid Approach
Frax takes a different path:
- Partially collateralized (USDC backing)
- Algorithmic stability (FXS token for rebalancing)
- Market-driven ratio (adjusts collateral % based on demand)
Currently ~92% collateralized with USDC/other assets.
Key difference from UST: Real backing exists, algorithm adjusts ratio.
Other Approaches
Fully Collateralized (DAI, USDC):
Safe, proven
Capital inefficient
Centralized (USDC) or complex (DAI)
Algorithmic (UST-style):
Capital efficient
Death spiral risk
Failed spectacularly
Hybrid (Frax, LUSD):
Balance of both
More capital efficient than fully collateralized
Still complex
Not fully tested at scale
Regulatory Landscape
Post-Terra, regulators are watching:
- US: Stablecoin bills in Congress
- EU: MiCA regulation requiring reserves
- Likely outcome: Algorithmic stablecoins heavily restricted or banned
My Questions
- Can algorithmic stablecoins ever be safe? Or is death spiral risk inherent?
- Is Frax’s hybrid model the future? Or will regulation kill it?
- Should we just accept centralized stablecoins (USDC)? Give up on decentralization for safety?
- What about over-collateralized models (DAI)? Too complex for mass adoption?
- Is there a “stablecoin singularity” where one model wins all?
Looking for perspectives from:
- Protocol builders designing stablecoin mechanisms
- Economists understanding stability dynamics
- Regulators/compliance folks seeing the legal landscape
- Traders who actually use stablecoins daily
Let’s discuss! 
Diana
Diana, this hits at the core of DeFi’s biggest failure. 
As someone building infrastructure, Terra/UST taught me that innovative mechanisms mean nothing if the math doesn’t work.
Why Algorithmic Failed
The death spiral is inevitable:
- UST depeg triggers LUNA minting
- LUNA price drops from new supply
- Panic accelerates selling
- Both tokens spiral to zero
This isn’t fixable. It’s the mechanism itself.
Frax’s Approach
Frax is smarter:
- 92% USDC backing = real floor
- 8% algorithmic = efficiency
- Can’t death spiral to zero
BUT still has risks:
- That 8% could cause volatility
- Heavy USDC dependency
- Regulatory pressure to go 100%
What Infrastructure Needs
For BlockEden and APIs:
We need to support stables that won’t disappear overnight.
Current support:
- USDC: Fully supported
- USDT: Supported (despite concerns)
- DAI: Supported
- Frax: Monitoring
- Algorithmic: Won’t add again
Lesson: Infrastructure providers need stability too.
My Take
USTC is boring and centralized.
That’s exactly why it works and why we build on it.
Brian 
From security perspective, stablecoins are attack vectors. 
Terra Was A Security Failure
Not just economics - security:
Attack surface:
- Oracle manipulation
- Arbitrage mechanism exploit
- Governance attacks
- Bank run engineering
What happened:
- Large holder(s) triggered depeg
- Arbitrageurs amplified it
- Panic did the rest
- B evaporated
Was it an attack or accident? We’ll never know. But mechanism allowed it.
Frax Security
Better than UST:
- Real collateral = harder to break
- 92% floor prevents zero
- More resilient
Still vulnerable:
- Smart contract risk
- USDC blacklist risk (Circle can freeze)
- Governance attacks
- Oracle manipulation
USDC Security
Centralization = security features:
- Circle can freeze malicious actors
- Regulatory oversight
- Audited reserves
- Legal recourse if problems
But also risks:
- Circle can freeze YOUR funds
- Government can force freezes
- Single point of failure
- Censorship possible
Recommendation
Low-value transactions: Any stable fine
High-value DeFi: USDC or DAI only
Long-term holding: USDC
Privacy needs: Avoid USDC (use DAI)
Algorithmic: NEVER for any use case.
Sophia 
Let me share stablecoin market data. 
Market Share (Current)
- USDT: B (58%)
- USDC: B (18%)
- DAI: B (3%)
- FRAX: M (0.4%)
- Others: B (20%)
Total: B stablecoin market
Historical Comparison
Pre-Terra (April 2022):
Post-Terra (Now):
- UST: /bin/zsh (-100%)
- FRAX: M (-76%)
Algorithmic experiment cost: B+ destroyed
Usage Patterns
USDT: 65% of DEX volume
USDC: 25% of DEX volume
DAI: 8% of DEX volume
Others: 2%
Reality: Traders use USDT/USDC. Everything else is niche.
Peg Stability
Last 12 months deviation from :
- USDC: 0.02% max
- USDT: 0.08% max
- DAI: 0.15% max
- FRAX: 0.45% max
More algorithmic = more volatility
My Analysis
Market already decided:
- Centralized wins (76% market share)
- Algorithmic dead (UST = 0)
- Hybrid struggling (Frax declining)
Data doesn’t lie.
Mike 
Excellent insights from everyone! 
Consensus Emerging
Brian: Infrastructure needs boring stability
Sophia: Security favors centralization features
Mike: Market data shows centralized dominance
Clear pattern: Centralized, fully-backed stables won.
What This Means
For DeFi builders:
Build on USDC/USDT. Accept centralized base layer.
For regulators:
Full reserves will be mandated. Algorithmic banned.
For users:
Use USDC for safety. USDT for liquidity. DAI for idealism.
For innovators:
The stablecoin problem is solved. Move on.
Key Lesson
Sometimes boring is best.
USTC is centralized, regulated, audited, boring.
That’s why it works.
Terra was exciting, innovative, algorithmic.
That’s why it failed.
The Future
USTC dominance grows. CBDCs compete. Algorithmic extinct.
DeFi adapts and builds value on stable infrastructure.
That’s the path forward. 
Diana