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Stablecoin design and the lesson UST should have been enough to teach

@blockonomist | 2026-05-16 15:18:50 |

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The stablecoin design tradeoffs piece I published covers the mechanics, but I want to say something more direct here: algorithmic stablecoins with reflexive second tokens were never going to survive a coordinated bank run, and the crypto industry knew this theoretically before UST failed.

The death spiral logic — stablecoin depegs, algorithm mints second token to defend peg, second token dumps, stablecoin depegs further — was described in academic papers and community discussions well before May 2022. The design was deployed anyway at $18B scale.

The uncomfortable truth is that the structure was deployed at that scale partly because the reflexive relationship between UST and LUNA created spectacular returns during the growth phase. The same feedback loop that destroyed value on the way down created enormous value on the way up. People who understood the failure mode participated anyway, betting they'd exit before the spiral began.

That's not irrational individual behavior — it's the tragedy of the commons at an institutional scale. The incentives during the growth phase were misaligned with the systemic risk during the failure phase.

I'm not drawing a moral conclusion here, just noting that "the market provided warnings" isn't sufficient. The market also provided extraordinary incentives to ignore those warnings until the last possible moment.

What I find interesting is how this episode affected subsequent stablecoin design thinking. CDP designs have gotten more conservative on collateral types. Fiat-backed issuers like Circle have been more forthcoming about reserve composition. Whether those adjustments are sufficient or whether they're just risk-management theater is worth watching.

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