By Chris Hollingworth 
Sonic Labs Abandons USD-Pegged Stablecoin in Favor of UAE Dirham Alternative
Sonic Labs, a prominent player in the blockchain space, recently made headlines by scrapping its plans to introduce a US dollar-pegged algorithmic stablecoin. Instead, the company has pivoted towards developing a United Arab Emirates dirham-denominated alternative.
The decision to change course was revealed by Sonic Labs co-founder Andre Cronje on March 28. Initially, the company had been working on a USD-pegged algorithmic stablecoin with an annual percentage rate (APR) of up to 23%. However, Cronje announced, “We will no longer be releasing a USD based algorithmic stable coin. Completely unrelated, we will be releasing a mathematically bound numerical Dirham which is settled and denominated in USD, which is definitely not a USD based algorithmic stable coin.”
This strategic shift comes in the wake of the UAE’s announcement regarding the launch of its own digital dirham central bank digital currency (CBDC) later this year. Khaled Mohamed Balama, the governor of the Central Bank of the UAE, highlighted the potential benefits of the blockchain-based dirham, emphasizing its role in enhancing financial stability and combating financial crime. The digital currency is poised to be accepted across all payment channels alongside its physical counterpart.
Criticism and Concerns Surrounding Sonic Labs’ Stablecoin Plans
Sonic Labs faced significant backlash and scrutiny over its initial proposal to launch an algorithmic stablecoin, a model that has been met with skepticism within the crypto industry following the collapse of the Terra ecosystem in 2022. Cronje himself acknowledged grappling with Post-traumatic stress disorder (PTSD) triggered by past experiences with algorithmic stablecoins.
The collapse of the $40 billion Terra ecosystem resulted in substantial losses, particularly affecting Terra’s algorithmic stablecoin, TerraUSD (UST), which had previously offered an annual percentage yield (APY) exceeding 20% on Anchor Protocol. The subsequent depegging of UST from the dollar led to a rapid decline in its value, plummeting to around $0.30. The repercussions were felt across the industry as Terraform Labs, the ecosystem’s creator, scrambled to address the crisis.
In response to the turmoil caused by the collapse of the algorithmic stablecoin issuer, regulatory bodies like the European Union have moved to implement measures aimed at mitigating systemic risks associated with such models. The Markets in Crypto-Assets Regulation (MiCA) bill, for instance, seeks to prohibit algorithmic stablecoins to prevent a recurrence of catastrophic failures akin to the Terra incident.
Notably, stablecoins are increasingly being utilized for day-to-day transactions rather than large-scale transfers, reflecting a shift towards their adoption as payment instruments. David Pakman, managing partner at CoinFund, highlighted this trend, noting a decline in the average size of stablecoin transactions, indicating a growing emphasis on their role in facilitating smaller payments.
In conclusion, Sonic Labs’ decision to veer away from a USD-pegged stablecoin in favor of a UAE dirham-denominated alternative underscores the evolving landscape of digital currencies and the ongoing efforts to navigate the complexities and risks associated with algorithmic stablecoin models.
