Cryptocurrency is experiencing a violent storm. Some still hold on to dear life.

Stablecoins, as the name suggests, are meant to be the stones of the crypto ecosystem, firmly pegged to real assets like the dollar. Exchanges use stablecoins to even out the volatility of other coins, and crypto investors may prefer them as a safer bet for holding money. So far, they have performed their function quite well, although questions regarding the safety of consumers and their potential for illegal activities certainly raise questions. caught the attention of regulators.

Algorithmic stablecoins, however, are different. This is a DeFi experiment with a stablecoin that is not pegged to fiat money and does not hold collateral to stabilize its value. Instead, they are usually backed by the second token in the “pull-me-pull” math equation. Terra, for example, balances stablecoin value fluctuations by increasing or decreasing the supply of Luna tokens through incentives; investors can profit from these exchanges, which allows them – in theory – to trade tokens in the amounts that the algorithm predicts. But a lot of it is magical thinking.

Long before the collapse of Terra, algorithmic stablecoins were generally considered to be much less stable than conventional. Even Sam Bankman-Fried, CEO of FTX crypto exchange and well-known “crypto billionaire”, argued on Twitter last week that the two types of stablecoins are so different both in terms of functionality and risk that “[r]we really shouldn’t use the same word for all these things.”

So why bother with algorithmic stablecoins at all? Because algorithmic stablecoins were supposed to be the holy grail of DeFi: a stable unit of value that self-corrects independently and elegantly, like water naturally finding its level. Bitcoin purists like them because algorithmic stablecoins try to avoid what conventional stablecoins like Tether and USDC rely on: connection to the real world and traditional markets. They only work with code – apart from human traders, of course, who the system assumes will act in a predictable manner. If algorithmic stablecoins work as promised, they could demonstrate that code is the future of finance, giving new credibility to the crypto worldview.

For a while, it looked like Terra’s experiment might work. In February, Terra closed multi-million dollar sponsorship deal with Washington Nationals. Just over two months ago, in March, its blockchain — the seventh most valuable in the world at the time — became network number two, overthrowing Ethereum. But on Monday, May 9, everything went wrong. Someone could push the UST value to fall, acting contrary to the predictions of the algorithm. The coin then collapsed well below the $1 value it was designed to support, fueled by very human, fear-driven “bank runs”. When UST reached $0.37 on Thursday, its owner Terraform Labs even went to the last resort for a temporary stop transactions on their network to protect against a further downturn, and then freeze them again overnight, preventing token holders from taking what little they have left and running. After the network restart, UST Terra continued to hover below $0.50; LUNA is hovering just above zero.

Every company in the crypto ecosystem has its own explanation for why it doesn’t work. The long-awaited new marketplace Coinbase NFT received unimpressive launch at the end of April, which may have scared off investors and affected the price of its shares. The Luna Foundation Guard, a non-profit organization supporting Terraform Labs, has stockpiled $3.5 billion in bitcoin by early May and then it seemed sell some of your inventory to stay afloat how the price of UST began to fall; both actions may have contributed to the fall in the value of Bitcoin. Some Terra/Luna supporters have even accused BlackRock and Citadel of deliberately manipulating the market to cause the UST to crash – a rumor vicious enough to sway the companies respond, claiming that they were not involved in this event. Then there is the issue of governance. CoinDesk reported that the CEO of Terraform Labs was also behind previous failed algorithmic experiment; perhaps his lead was another hole in the stablecoin boat.

But all of these misguided elements make up an experimental system that is vulnerable to the same market trends as traditional finance, only without strict regulation and strong safeguards. The price of a wild ride last week hit some $270 billion in crypto assets lost. Even the non-algorithmic stablecoin Tether. briefly dropped below its $1 peg last week, indicating that standard stablecoins may not be immune to volatility. And the impact of all this activity probably doesn’t end at the frontier of cryptography. With banks launch crypto products and non-algorithmic stablecoins relying on the fiat dollar to keep them stable, the crypto industry is clearly “pegged” to the rest of the financial market in several ways; Now the question is whether the sharp drop in coins will affect traditional stocks. In January, Paul Krugman predicted New York Times that cryptoassets could be the new subprime mortgages—bad eggs that could ruin the entire market. This week, individual crypto investors stated already lost their savings. There may be more pain in store.

But even when social networks are filled with ridicule memes and skeptical news outlets To label this as the start of a crypto “winter” – a term used for technologies that are going through a long period of lack of public interest and lack of innovation – crypto leaders and investors are not just betting that the crypto ecosystem will return to its glory days, they are planning for it. Even the word “winter” implies that for believers who can wait it out, there will be spring. Terra founder Do Kwon tweeted on Wednesday. letter with carving to the Terra community, describing his plan to revive the stablecoin, assuring the community that everything will turn out. “Short-term hitches do not determine what you can achieve,” he wrote. “What matters is how you respond.” Coinbase founder Brian Armstrong also says he is fully focused on the future as the company’s shares rose again on Thursday after loses half its value. In an internal memorandum that Armstrong made public, he wrote: “Volatility is inevitable. We cannot control it, but we plan for it. …I just know that we will switch sides and be stronger than ever if we focus on what matters most: building.”