Goldman Sachs says algorithmic stablecoins can succeed only with broad adoption in payments

Algorithmic stablecoins can succeed in the long run only if they achieve broad adoption in payments. Goldman Sachs analysts arrived at this conclusion, The Block reports.

In their report, the analysts noted that stablecoins are currently used as a means of payment “only to a limited extent”.

“If real-world use cases expand over time, this could create a more stable base of demand for the assets. Hypothetically, an algorithmic stablecoin could survive in the long term if it had a steady demand tied to transactions,” the document states.

“However, algorithmic stablecoins, in particular, are vulnerable to self-fulfilling crises, which is now evident after the collapse of UST and LUNA. … regulatory oversight could improve stability and reduce risk in the stablecoin market,” the analysts added.

Goldman Sachs weighs in on algo-stablecoins in new research note to clients

“Algorithmic stablecoins in particular are vulnerable to self-fulfilling crises, as is now obvious after the decline of UST and LUNA. Regulation seems likely, in our view…” pic.twitter.com/ykKna3PKTu

— Frank Chaparro (@fintechfrank) May 17, 2022

Prices of UST and LUNA began to fall on May 10, amid outflows from the Anchor protocol as yields on deposits fell to 17.87%. As a result, on May 8 the “stable coin” briefly lost its peg to the dollar.

The decline continued on May 11, followed by LUNA, used to mint the algorithmic stablecoin, plunging to $0.3.

Earlier, Tether’s chief technology officer Paolo Ardoino stated that UST is dangerous for the crypto market due to its collateral approach.

In May, U.S. Treasury Secretary Janet Yellen urged enact legislation regulating stablecoins by the end of 2022.

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