Here is our pick of the 3 most important Stablecoin news stories during the week.
The Humpty Dumpty of stablecoins!
This last week was all about the Algo stablecoin Terra, which lost its peg to the USD, its credibility and a lot of people a lot of money.
Firstly the “bank run” analogy isn’t appropriate for algorithmic stablecoins, which are not redeemable IOUs such as Tether or Circle. They really are a computer based form of FX-rate targeting central bank and in this sense are nothing new. The SNB (Swiss Central Bank) lost its peg in 2015 and the Swiss Franc lost over 15% in under one second which caused massive financial losses to rich and poor alike (an example among many was Polish farmers who had borrowed in Swiss Francs now found themselves in a mountain of unsustainable debt). So we have seen this before.
Crash of TerraUSD Shakes Crypto. ‘There Was a Run on the Bank.’ – WSJ
Are Algo stablecoins designers trying to do too much? This paper discusses the design trilema that the builders are wrestling with is that out of three objectives – peg stability, decentralisation, and capital efficiency – only two can be met by a given design.
Algorithmic stablecoins and devaluation risk | VOX, CEPR Policy Portal (voxeu.org)
Who made money on this trade and how much? Historically, the big peg break was back in 1992 when George Sorros attacked the British pound and made 1 Billion profit using a similar system to what was used here. Shorting GBP by borrowing then selling in the market forcing the price down and then repaying by buying at a much lower price.
This attack was similar, with only replacing GBP with BTC. Simply put by shorting BTC (borrowing) and then attacking Luna to make sure there is a big forced seller driving the price down to enable the borrowed funds to be paid back at a profit.
It’s a little bit more complicated than that which this thread explains, but the net position is almost an identical 1 Billion profit. Once again, we have seen this before.
Onchain Wizard on Twitter: “How to make a >800 million dollars in crypto attacking the once 3rd largest stablecoin, Soros style: Everyone is talking about the $UST attack right now, including Janet Yellen. But no one is talking about how much money the attacker made (or how brilliant it was). Lets dig in🧵 https://t.co/nGVfqjpVJb” / Twitter
So the Algo dream of stable money with no human intervention, lives on if a little bruised. Humpty Dumpty has had a great fall and no Kings horses and no Kings men have any interest in putting him together again. There will be no outside or state led help, the true believers are going to have to do this themselves.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years. Twitter @Alan_SmartMoney
We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.
For context on stablecoins please read this introductory interview with Alan “How stablecoins will change our world” and read articles tagged stablecoin in our archives.
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