defining stablecoins; latest on NFTs; policy moves
1. Definitions to help tease apart signal vs. noise: Algorithmic stablecoins
Given all the ongoing events and discussion around “algorithmic stablecoins”, what’s a useful way to define and tease them apart? Broadly defined, algorithmic stablecoins are stablecoins whose value is not only pegged to a fiat currency, but are governed by algorithms (to dynamically reduce the price volatility). However, it’s helpful to understand the relative safety of a stablecoin as a product of two features: (1) the algorithms it uses (both for liquidations and to maintain the stablecoin peg); and (2) its collateralization (that is, the assets backing up the outstanding stablecoins).
Generally speaking, newer and larger stablecoins do not fail as a result of the use of an algorithm, but rather due to collateral design. The relative risk with respect to the latter usually boils down to (1) how much collateral is required by the protocol to mint the stablecoins; and (2) the quality of the assets making up the collateral. Amounts can range from under-collateralized (less than $1 to mint $1 of the stablecoin) to fully-collateralized (exactly $1 to mint) to over-collateralized (more than $1 to mint), which is the least risky. As for assessing the quality of the assets, it’s useful to separate endogenous collateral (native to the issuing protocol) from exogenous collateral — the former is more prone to a “death spiral”, while the latter is less risky. Given this, endogenous collateral should be heavily discounted in assessing a protocol’s overall collateralization.
Ultimately, it might be best to separate “undercollateralized pegged coins” (including those using endogenous collateral) from the categories of “algorithmic” and “stablecoins” to add more nuance to policy discussions prioritizing consumer protection and supporting innovation.
2. Stay on top of the latest: Securing and evolving NFTs
Michael Blau, Nassim Eddequiouaq, Sonal Chokshi
Building usable security will be critical as NFTs scale across applications and mediums — including “dynamic NFTs” for art, identity, and experiences (token access to events or communities, more). In a recent episode of our podcast ‘web3 with a16z’, expert guests discuss security best practices for builders; experiments in the space; and trends now and ahead — and also address some common myths and misconceptions along the way (artist royalties in smart contracts? hmm… immutability? well…)
3. In the news: Minecraft bans NFTs
Just a few days ago, Microsoft-owned Mojang Studios banned NFTs on its popular Minecraft video game platform. The company stated that NFTs conflict with a “safe and inclusive experience” because they create “digital ownership” based on scarcity among other reasons. It’s a good reminder of the dangers of building on corporate-owned web2 networks, observed a16z crypto’s Chris Dixon: “They change the rules on developers on a whim.” But this move also offers an opportunity for developers to build a competitor and alternative marketplaces.
4. Top of mind: Policy moves & news
Coinbase on a “workable regulatory framework” and petition questions to aid regulatory clarity [read 📖]
Discussion with Congressman Jake Auchincloss, Chris Dixon, Miles Jennings on policy principles and topics for crypto in the U.S. [listen 🎧]
--Sonal Chokshi, Robert Hackett, and a16z crypto team
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