Here is our pick of the 3 most important Stablecoin news stories during the week.
As the dust settles on the cataclysmic collapse of the Terra (UST) ecosystem, an on-chain deep-dive carried out by blockchain analytics firm Nansen highlights two major takeaways.
Only a few (7 wallets) along with deep knowledge (maybe inside) of how the ecosystem and technology worked were involved in the attack. The report is silent on where the money went and why. But we do know more about the how.
While regulatory discussions around stablecoins have gained pace in the light of the UST debacle, it has also highlighted that the crypto market has evolved enough to absorb a $40-billion run-down (equivalent to the market cap of Lehman’s in 2008). This proved that the crypto market has grown enough to absorb a setback as big as Terra without posing a threat to broader market stability. Both Crypto and TradFi withstood this massive realignment without government intervention.
However, this Terra collapse could also prove to be a turning point for stablecoin regulations around the globe, quite similar to what Libra’s global stablecoin plans did for CBDCs — i.e., prompting regulators to accelerate their own plans.
And Finally this week, Vitalik Buterin weighed in on how designers should set about building stablecoins.
“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking”.
He proposed the following two principals:
1: Can the stablecoin ‘wind down’ to zero users?
In Buterin’s view, if the market activity for a stablecoin project “drops to near zero,” users should be able to extract the fair value of their liquidity out of the asset.
Buterin highlighted that UST doesn’t meet this parameter due to its structure in which LUNA, or what he calls a volume coin (volcoin), needs to maintain its price and user demand to keep its United States dollar peg. If the opposite happens, it then almost becomes impossible to avoid a collapse of both assets:
2: Negative interest rates option required
Buterin also feels it is vital for an algo-stablecoin to be able to implement a negative interest rate when it is tracking “a basket of assets, a consumer price index, or some arbitrarily complex formula” that grows by 20% per year.
“Obviously, there is no genuine investment that can get anywhere close to 20% returns per year, and there is definitely no genuine investment that can keep increasing its return rate by 4% per year forever. But what happens if you try?” he said.
So in summary, this week we saw the continued fall out of the Terra stablecoin collapse and some talk of how it could be resurrected, which I have not bothered highlighting here as it still looks like wishful thinking. But be assured, the regulators and their political partners have their poster child, now what will they do with it?
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years. Twitter @Alan_SmartMoney
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