Wednesday, June 29, 2022

Crypto is weathering a bitter storm. Some still hold on for precious life.

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Shreya Christina
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Stablecoins, as the name suggests, are designed as the rocks of the crypto ecosystem, tightly tethered to real assets like the dollar. Exchanges use stablecoins to even out the volatility of other coins, and crypto investors may prefer it as a safer bet to park money. They have fulfilled their function quite well thus far, although questions about consumer safety and their potential for illegal activity have certainly done so caught the attention of regulators

Algorithmic stable coinsare different, however. They are a DeFi experiment in a stablecoin that does not link itself to fiat money or hold collateral to stabilize its value. Instead, they are usually backed by a second token, in a push-me-pull-you math equation. For example, Terra compensates for variations in the stablecoin’s value by increasing or decreasing the supply of Luna tokens through incentives; investors can take advantage of these exchanges, allowing them – in theory – to continue trading tokens in the amounts the algorithm predicts. But much of this is magical thinking.

Well before the Terra crash, algorithmic stablecoins were generally regarded as much less stable than ordinary† Even Sam Bankman-Fried, CEO of the crypto exchange FTX and notable “crypto billionaire”, arguing on twitter last week that the two types of stablecoins are so different from both a functional and a risk perspective that “[r]We really shouldn’t be using the same word for all these things.”

So why pursue algorithmic stablecoins at all? Because algorithmic stablecoins would be DeFi’s holy grail: a stable unit of value that corrects itself independently and elegantly, just as water naturally finds its own level. They are appealing to Bitcoin purists because algorithmic stablecoins target to avoid what mainstream stablecoins like Tether and USDC rely on to function: a connection to the real world and traditional markets. They only work on code – in addition to, of course, the human traders who the system assumes will trade in a predictable way. If algorithmic stablecoins perform 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 a multi-million dollar sponsorship deal with the Washington Nationals. Just over two months ago, in March, the blockchain — the seventh most valuable in the world at the time — became the number two expanded networkAstonished Ethereum. But on Monday, May 9th went wrong. Someone may have pushed the value of UST to begin to decline, going through the algorithm to counter the predictions. Toen crashte de munt tot ver onder de waarde van $ 1 die hij moest behouden, gevoed door zeer menselijke, door angst gedreven ‘bankruns’. When UST Thursday reached $ 0.37, the company did it manages, terraform Labs, even the last resort to temporary stop transactions on its network to protect against further deterioration and then refreeze them overnight – preventing token holders from taking what little they had left and running. Since the network reboot, Terra’s UST has continued to hover well below $0.50; LUNA hovers just above zero.

Every company in the crypto ecosystem has its own explanation of why it falters. Coinbase’s highly anticipated new NFT marketplace had a disappointing launch in late April, which may have deterred investors and hurt the stock price. The Luna Foundation Guard, the nonprofit that supports Terraform Labs, had stockpiled $3.5 Billion in Bitcoin in Early May and then it seemed sell part of his stock to keep his head above water when the price of UST started to fall; both actions could have contributed to a decline in Bitcoin’s value. Some Terra/Luna supporters even accused BlackRock and Citadel of deliberately manipulating the market to crash UST – a rumor mean enough to incite the companies. answer, claiming they had no hand in the event. Then there is the issue of management. CoinDesk reported that the CEO of Terraform Labs is also behind a previous failed algorithmic experiment† perhaps his leadership was another hole in the stablecoin’s boat.

But all these faulty parts add up to an experimental system that is vulnerable to the same market trends as traditional finance, only without strict regulations and strong guardrails. The price tag of last week’s wild ride was just right $270 Billion in Crypto Assets lost. Even the non-algorithmic powerhouse stablecoin Tether briefly dipped below $1 peg last week, indicating that standard stablecoins may not be immune to volatility. And the impact of all this activity is unlikely to end at the crypto frontier. Of banks launch crypto products and non-algorithmic stable coins that rely on the paper dollar to keep them stable, the crypto industry is clearly “tied” to the rest of the financial market in multiple ways; the question now is whether the plummeting currencies will drag traditional stocks down in return. In January, Paul Krugman predicted in The New York Times that crypto assets could be the new subprime mortgages – bad eggs that have the power to spoil the entire market. This week, individual crypto investors have claimed have already lost their savings. There may be more pain in store.

But even as social media fills with mockery memes and skeptical news broadcasts label this as the beginning of a crypto “winter” – a term used for technologies that are undergoing an extended period of public disinterest and lack of innovation – crypto executives and investors are not just betting that the crypto ecosystem will return to its glory days, they are planning it. Even the word “winter” implies that there will be a spring for the faithful who can wait for it. On Wednesday, Terra founder Do Kwon . tweeted a threaded letter to the Terra community, outlining his plan to revive the stablecoin, assuring the community that it would change. “Short-term stumbling blocks don’t determine what you can achieve,” he wrote. “It’s about how you react.” Coinbase founder Brian Armstrong also claims a complete focus on the future as the company’s shares rose again on Thursday. lose half its value† In an internal memo that Armstrong made publiche wrote, “Volatility is inevitable. We can’t control it, but we do plan it. …I just know we’ll make it across, and we’ll come out stronger than ever if we focus on what’s important: to build.”

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