Crypto is weathering a bitter storm. Some are still holding on for dear life.

Algorithmic stablecoins, however, are different. They are a DeFi experiment that aren’t pegged to fiat money and don’t hold collateral assets to stabilize their value. Instead, they are usually supported by a second token, in a push-me-pull-you math equation. Terra, for example, balances variations in the stablecoin’s value by increasing or decreasing the supply of Luna tokens through incentives; investors can profit off these exchanges, which keeps them—in theory—trading tokens in the amounts the algorithm predicts they will. But much of this is magical thinking.

Well before the Terra crash, algorithmic stablecoins were generally understood to be much less stable than regular ones. Even Sam Bankman-Fried, CEO of the crypto exchange FTX and a notable “crypto billionaire,” argued on Twitter last week that the two types of stablecoins are so distinct from both a functional and risk perspective that “[r]eally, we shouldn’t use the same word for all these things.” 

So why pursue algorithmic stablecoins at all? Because they were supposed to be the DeFi holy grail: a stable unit of value that self-corrects independently and elegantly, like water naturally finding its own level. They appeal to Bitcoin purists because algorithmic stablecoins aim to avoid what regular stablecoins like Tether and USDC rely on to function: a tie to the real world and traditional markets. They operate on code alone—besides, of course, the human traders the system presumes will act in a predictable way. If algorithmic stablecoins perform as promised, they could demonstrate that code is the future of finance, lending new credibility to the crypto worldview. 

For a while, it looked as if Terra’s experiment might just work. In February, Terra closed a multimillion-dollar sponsorship deal with the Washington Nationals. Just over two months ago, in March, its blockchain—the seventh most valuable in the world at the time—became the number two staked network, unseating Ethereum. But on Monday, May 9, things went off course. Someone may have pushed UST’s value to start dropping by acting against the algorithm’s predictions. Then the coin crashed to well below the $1 value it was designed to maintain, fueled by very human, fear-driven “bank runs.”

When UST reached $0.37 on Thursday, the company that manages it, Terraform Labs, even made the last-resort call to temporarily stop transactions on its network to protect against further decline and then froze them once more overnight—preventing any token holders from taking what little they had left and running. Since the network restarted, Terra’s UST has continued to fluctuate well under $0.50; Luna hovers just above zero.

Each company in the crypto ecosystem has its own explanation for why it’s faltering. Coinbase’s much-anticipated new NFT marketplace had an underwhelming launch at the end of April, which may have put off investors and hurt its stock price. The Luna Foundation Guard, the nonprofit that supports Terraform Labs, had stockpiled $3.5 billion in Bitcoin by early May and then seemed to sell off a chunk of its stash in order stay afloat as the price of UST began to dip; both actions could have helped contribute to drops in Bitcoin’s value. Some Terra/Luna supporters even accused BlackRock and Citadel of intentionally manipulating the market to force UST to crash—a rumor vicious enough to prompt the companies to respond, asserting that they had no hand in the event. Then there’s the question of management. CoinDesk reported that the CEO of Terraform Labs was also behind a previous failed algorithmic experiment; maybe his leadership was another hole in the stablecoin’s boat.