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11 Wake Forest L. Rev. Online 131 (2021)
Built to Fail: The Inherent Fragility of Algorithmic Stablecoins

handle is hein.journals/wflron11 and id is 132 raw text is: BUILT TO FAIL: THE INHERENT FRAGILITY OF ALGORITHMIC STABLECOINS Dr. Ryan Clements* Algorithmic stablecoins are inherently fragile. These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability. Iterations to date have struggled to maintain a stable peg, and some have failed catastrophically. This Article argues that algorithmic stablecoins are fundamentally flawed because they rely on three factors which history has shown to be impossible to control. First, they require a support level of demand for operational stability. Second, they rely on independent actors with market incentives to perform price-stabilizing arbitrage. Finally, they require reliable price information at all times. None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility. Regulatory guidelines are needed for all stablecoin forms, including issuer registration requirements, a defined taxonomy clarifying forms, prudential, collateral custody, and transparency safeguards, and risk disclosure and containment measures. A strong regulatory framework, with risk disclosure and containment safeguards, is particularly needed for algorithmic stablecoins, which currently serve only speculative DeFi trading applications and have very little, if any, societal or financial inclusionary value. INTRODUCTION Financial product innovation is not always a good thing, and certain innovations are designed in a way to make them inherently unstable. In 2008, the entire financial system nearly collapsed due to a dizzying array of complex securitization-driven, derivatives- enhanced financial product innovations, which emanated from home 131 * Dr. Ryan Clements, SJD (Duke) is an Assistant Professor, Chair in Business Law and Regulation at the University of Calgary Faculty of Law and a nonresident fellow of the Duke Global Financial Markets Center.