Do algorithmic stablecoins have what it takes to dethrone centralized stablecoins?

The New York Department of Financial Services ordered Paxos Trust Company, the issuer of Binance's native stablecoin, to stop minting new BUSD tokens immediately on 13 February 2023.

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The action was taken after the issue of a well notice by the United States Securities and Exchange Commission alleging that BUSD tokens break securities laws.

Binance CEO Chagpeng Zhao, or "CZ," raised his voice during a Twitter AMA regarding the allegations against BUSD, saying that the crypto industry might have to go for alternatives to the U.S. dollar stablecoins to reduce its reliance. For example, people should focus on tokens pegged to the euro or Japanese yen.

CZ commented that the U.S. dollar's dominance in international markets is one of the main reasons why dollar-pegged stablecoins are so popular. Yet, regulatory actions against those tokens and assets may allow other stablecoins to grow.

Binance's CEO talked about euro-pegged stablecoins and algorithmic stablecoins, the majority of which are decentralized. He noted that even though these tokens are way riskier than fiat-backed tokens, they might play an important role in the future of the crypto ecosystem.

Algorithmic stablecoins are a type of cryptocurrency that uses a mechanism to maintain a stable price instead of being backed by a fiat currency or a physical asset like gold. They typically rely on two types of tokens – a stablecoin and another crypto asset that supports the stablecoin. In this case, the algorithm regulates the relationship between them.

As centralized coins are scrutinized, crypto enthusiasts might want to look in another direction. As CZ stated, algorithmic stablecoins are riskier than fiat-backed stablecoins, yet there are also some pros to consider.

Pros:

Algorithmic stablecoins use codes to continually prevent prices from fluctuating too much from the pegged asset. These coins can sell tokens if the price goes below the peg and vice versa. Also, these stablecoins can build a better trusting relationship between users and developers since the peg relies on an algorithm. Algorithmic stablecoins have no connection to any third party, which makes them truly decentralized within the stablecoin market.

Cons:

Although algorithmic stablecoins rely on a mechanism to maintain the price near the peg, they remain vulnerable to de-pegging. The demands affect these coins, so having no need for coins can provoke a significant price drop. Also, they depend on investors making the right decisions since herd mentality and emotional decisions can cause a panic sell of the algorithm stablecoins, resulting in a price decrease.

DAO Maker co-founder, Hassan Sheikh, told Cointelegraph that moving to algorithmic stablecoins is not as easy as it sounds.

"Any decentralized stablecoin to be adopted by exchanges is not yet on the market. It won't be DAI or the like. The market caps aren't significant enough to have the necessary network effect," Sheikh said. "Exchanges would likely fork off protocols like Maker and push for the traction of their controlled 'decentralized' stablecoin for that value capture. The decentralized stablecoin on exchanges wouldn't be truly decentralized, and it most likely doesn't exist yet, as the major ones would likely pursue their own."

Despite several regulatory measures against U.S. dollar-pegged stablecoins, USDT remains on top of the list. Crypto experts suggest that centralized stablecoins will likely stay relevant and dominate the market. Meanwhile, decentralized stablecoins might have a bright future, but real-life implementations have stopped that shift.

Sources: cointelegraph.com, www.coindesk.com, www.zeeve.io