(Un)Stable Coins - Under Pressure
The latest speculations are that the BTC reserves were not used by Terra to maintain the peg but were in fact sent to a cold wallet is the latest blow to UST/Luna bagholders.
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The fallout of the collapse of Luna and UST that is getting worse and worse has now got the whole crypto market focused on stable coins and the next largest cap ones are being heavily scrutinised.
There are huge risks at play as this could be used as a rouse for governments to step in and "save" investors by regulating (read banning) the hell out of stable coins or any particular crypto they don't like. The ones they particularly don't like are ones that are Defi and allow anonymous usage.
Having pegs as we have seen historically with fiat currencies usually always end up getting broken, often with bad consequences for those a peg is most supposed to benefit.
A particularly farcical one was the case where the UK famously lost its peg and was forced to withdraw from the European Exchange Rate Mechanism. It is commonly known as Black Wednesday.
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This shows that even countries supported by central banks that can print as they wish can not even support pegs sometimes. Only the Fed and the ECB seem to be large and powerful enough to be able to support a peg if they want. The ECB head Mario Draghi famously said it would do whatever it takes to defend the euro and they have been largely successful. source
Therefore, can it be expected that crypto algorithms can defend pegs? So far the test with Luna and UST has shown us that it is not possible. We do not know what could have happened if Do Kwon had let the peg go and UST holders lose their investment, but instead, he decided to defend the peg at the expense of the whole Terra ecosystem and allow the death spiral to destroy UST and luna. Sadly there was probably no other course of action because the only utility on Terra is the Luna/UST stable coin.
And the latest allegations that Do Kwon is making off like a bandit with the BTC assets, will not give people confidence in the crypto market.
USDT and USDC are currently ranked 3rd and 4th and there is close(r) scrutiny of their assets beginning. Previously Tether's assets were not fully audited, so there are some doubts if they would be able to hold the peg if it comes under pressure.
Tether although ranked 3rd largest crypto by market cap has actually the largest DAILY traded volume. The fall of Tether could trigger the next big move down for Bitcoin and the whole crypto space.
However, Tether has sought to try and soothe market concerns in their latest quarterly assurance opinion where they have massively reduced their commercial (read risky) paper holdings by 17% with a pivot to more short term Treasuries.
More pressing for Tether is if that is enough? Currently, they have survived a more than 10% run on their capital that no major bank could probably survive!
As you can see the 3rd largest crypto has in the last few days lost nearly $10bn in market-cap!!! Where will this end??
In contrast, the money doesn't seem to be 100% flowing into the 4th largest crypto USDC where the market cap has only slightly increased by a couple of billion dollars.
Has the market's appetite for USD$ pegged coins subsided or the market is just re-evaluating the risk and lack of transparency behind these tokens? So far it looks like the market hasn't made its mind up yet but we may see where this trend leads us.
Even if the stable coins are fully backed with assets, there may be such high liquidations that converting the assets to liquid dollars may still be a problem and cause issues for the holders of these tokens.
If I were a holder of USDT, why would I take the risk and continue to hold it and risk another blow up like UST? With such huge outflows in a week, the future doesn't look rosy!
The crypto market may in future be moving towards a world measuring things in crypto and forgetting the artificial fiat currency values.
Time will tell.
Thanks for reading.
Resources: Title images made in Canva. Charts sourced from Coinmarketcap.com
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