The US investment bank attributes the collapse of Terra's algorithmic stablecoin, UST, to its lack of mass adoption as a payment method.
While Terra created its decentralized, algorithmic stablecoin, TerraUSD (UST), with the goal of bringing DeFi to the masses, Goldman Sachs analysts noted that its collapse could have been avoided, hypothetically, if the stablecoin was widely used as a payment method and there was a constant demand for it to carry out transactions.
«Hypothetically, an algorithmic stablecoin could survive in the long term, if it had a continuous demand related to transactions», the New York-based investment bank said this week.
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Amid the UST and LUNA crisis, which fell below $0,000017 last Friday following the implosion of the algorithmic stablecoin, several financial and analysis firms have presented their conclusions on what happened in the Terra ecosystem.
Goldman Sachs analysts attribute part of UST's decoupling from the dollar to its lack of mass adoption. In a report sent by the bank to its investors, Analysts point out that stablecoins currently have limited use as a means of payment..
For their part, analysts at the financial advisory firm Bloomberg indicated that the collapse of Terra's algorithmic stablecoin was caused by the sale and massive withdrawal of UST from decentralized protocols such as Curve Finance, the weekend before its major drop.
Kaiko Research analyst Clara Medalie believes the algorithmic stablecoin's decoupling could have been the work of a potentially coordinated and malicious attack on the ecosystem, while GSR COO John Kramer spoke of an attempt to manipulate UST.
Stablecoins need regulation to minimize risk and increase trust
Despite the losses caused by the UST crash, Goldman Sachs believes that algorithmic stablecoins could still have a place in the new digital economy, although it also noted that this type of stablecoins are more vulnerable to speculative attacks and “self-fulfilling crises.”
According to the bank's report, seen by The Block, the use and adoption of stablecoins as a form of payment and exchange of value would provide a more stable base that would help this type of currency maintain its price over time.
“Positive network effects from increased non-speculative use cases for these protocols could contribute to a more stable demand base over time”, Goldman Sachs said.
Analysts and strategists at the bank also support the idea of adaptive regulation for stablecoins, which would help mitigate the risk of these assets and provide greater confidence and security to investors. With the large drop caused by UST in the crypto market, crypto regulation seems more likely, the bank's analysts said last week.
The UST crash also shook the stability of other stablecoins on the market, such as Tether (USDT), which touched $0,94 per unit last Thursday.
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Continue reading: Analysis: Why did UST and Terra collapse?
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