MoneyView - When Terra Lost Her Peg
May 13th, 2022

A plunge into crypto….

This week marked a massive sell-off of nearly $200B in crypto market wealth, as reported in Bloomberg via price tracking website CoinMarketCap … which happens to be owned by Binance Holding Limited … which has its own stable coin BUSD. Nothing to see here - read on….

Now let’s start by saying this has ZERO investment advice. This is an attempt to understand a tiny sliver of the cryptocurrency marketplace during this specific place in time. Because this is so nuanced and dynamic, we’re going to focus on algorithmic stablecoins and where they fit into the larger race toward cryptomarkets.

Crypto is volatile. Stablecoins are currencies that are supposed to be pegged to fiat currencies like the US dollar. Their purpose is to provide an exit from volatility when the seas get choppy. IRL, a long, long time ago, the US Treasury pegged the dollar’s store of value in gold at the Federal Reserve. The recall of gold from US citizens lead to a price increase from $20 to nearly $35/oz - effectively increasing the value of the Reserves balance sheets by 69%. Here’s more if you want to read up on this….

Maintaining the peg….

Each stablecoin maintains its relationship (collateralization) back to the fiat a little differently. The two largest stablecoins are USDT (iFinex)and USDC (Circle) of 5/13/2022 at 11:28am of 5/13/2022 at 11:28am

These stablecoins are collateralized by fiat reserves, meaning they have an equivalent value of assets in their reserves. So each USDC or UST in the market is backed by what’s in possession of the issuer. As if that’s not shaky enough, new stablecoins have emerged called algocoins TerraUSD (UST) and others like Frax and MIM.

Algocoins are backed by a software program that relates the supply and demand to another currency that props them up - in the case of Terra, the coin is called Luna.

Terra, otherwise known as UST, is an algorithmic stablecoin that is backed by its sister currency LUNA. In a sense, this seems like a fabricated supply and demand software that allows a currency to be undercollateralized due to the nature of its ability to control market conditions. The way it handles volatility is a complicated protocol but essentially, it’s pegged by allowing users to burn one and receive the other to remain at the $1USD.

So here’s the thing….a healthy market economy relies on an efficient market with equal access to the same information about price, supply, and demand. Algo’s don’t provide that equality, and some might argue contribute negatively as it relates to the level of technology used in their production. They are totally unregulated and have the ability to control the expectation of future prices.

It’s not all bad….

Crypto and traditional markets are not the same game, but they have a lot of the same players. “It takes one to know one” comes to mind. There is a huge line in the sand between how (and who) will regulate crypto markets. Back in March, President Biden issued an executive order on Ensuring Responsible Development of Digital Assets. Here’s the full order and here is the brief. A discussion point could be to argue for or against issuing stablecoins against other fiat currencies. For example, USDT is pegged 1:1, and Tether is owned by iFinex, a company registered in Hong Kong. These registries are likely due to government limitations, or even recognizance in limiting law.

But before we go - let’s ask ourselves this…..

The $200B value of the loss is being thrown around in every media outlet. Terra UST died a painful death this week - there is little doubt about that. According to coingecko, UST had a market cap of just under 19B with volume of $765M on Saturday the 7th…roughly 10% of the value behind the noise.

We need stablecoins - we need some regulation, but we also need some help separating the hull from the kernel when it comes to the way this information is presented.

Really good articles out there that take this much deeper:

This one from @drorpoleg gets into the technicals way better.

From Coindesk on Algorithmic Stablecoins

UST reference from CoinGecko (anyone with an understanding of trading bots will get a kick out of watching the volume of UST freefall over the past 7days)

Here’s one from Fortune about building markets


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