Fantom Founder Andre Cronje Highlights Risk Of Non-Colateral Stablecoin

Fantom founder Andre Cronje highlighted the problem of non-colateral stablecoins. (Photo; Doc. MoneyTimes)

JAKARTA In a decentralized financial environment (DeFi), non-colateral stablecoins and high yield claims have become a hot topic, especially after TerraUSD (UST) failures and its Anchor protocol. Andre Cronje, creator of the Fantom blockchain, recently expressed concern about the risks associated with these products.

Non-Colateral Stablecoin, What Is It?

Non-colateral stablecoins are a type of cryptocurrency whose value is designed to remain stable and not supported by physical assets or fiat currencies. In contrast to colateral stablecoins that guarantee value with assets such as US dollars or gold, non-colateral stablecoins rely on algorithms and market mechanisms to maintain price stability. This is done by automatically adjusting the supply of coins in the market based on demand and supply.

For example, if non-colateral stablecoin prices start to fall below the targeted value, the system will automatically reduce the number of coins in circulation to increase the price. On the other hand, if the price goes up, the system will create more coins to lower the price back to the target. This approach allows non-colateral stablecoins to offer stability without the need for reserve assets, but also carries a higher risk as it relies on user trust and adoption.

Andre Cronje's Concerns

Andre Cronje, a prominent figure in DeFi, highlighted the potential dangers of non-colateral stablecoins and unrealistic yield levels. In a post, he warned that a seemingly stable market situation could rapidly change, resulting in negative funding and marginal and colateral liquidation.

Cronje highlighted the USDe stablecoin from Ethena Labs, which offers an annual yield rate (APY) of 27.6%, much higher than the 20% offered by UST before its collapse.

Ethena Labs' Guy Young acknowledged the concern as a sign of a mature industry, stressing that the level of negative funding is not a big deal based on the experience of 2022.

Ethena Labs Prevention Steps

Ethena Labs, through its founder Guy Young, responded to concerns by showing that they have taken steps to address potential negative funding rates:

Emergency Insurance Funds: As a precautionary measure, emergency insurance funds have been prepared.

Arbitration Mechanism: This mechanism is designed to prevent negation and ensure stability.

While concerns about non-colateral stablecoins and high yield levels remain, Ethena Labs seeks to ensure the safety and sustainability of their products with strong transparency and preventive measures. This shows continued efforts in DeFi to build trust and stability after TerraUSD's events.