Stablecoins Are Crypto’s Killer App So Far – Just Not Terra

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  • Per­mis­sion­less pan­elists agreed that algo­rith­mic sta­ble­coin Terra’s doomed design was reckless
  • Ter­raform Labs founder Do Kwon was orig­i­nal­ly sched­uled to appear on-stage along­side his critics

Cir­cle redeemed $7 bil­lion worth of USDC last week as mar­kets react­ed to Terra’s demise — high­light­ing how crit­i­cal sta­ble­coin col­lat­er­al­iza­tion is dur­ing intense volatility.

The Boston-head­quar­tered sta­ble­coin issuer redeemed $61 bil­lion last year, Circle’s vice pres­i­dent of prod­uct man­age­ment Joao Regi­nat­to said dur­ing a pan­el dis­cus­sion at Block­works’ Per­mis­sion­less event in Palm Beach on Wednesday.

That means Cir­cle processed more than 11% of its total redemp­tions for an entire year in just one week — a week that saw $280 bil­lion drained from cryptocurrency’s total mar­ket capitalization.

Oth­er pan­elists includ­ed Cas­tle Island Ven­tures’ Nic Carter, Visa’s head of CBDC and pro­to­col Cather­ine Gu, Mak­er­DAO lead devel­op­er Sam MacPher­son, and Frax founder Sam Kazemi­an. Ter­raform Labs founder Do Kwon was orig­i­nal­ly sched­uled to appear on the panel.

“Our mod­el is super bor­ing, it’s very, very sim­ple: full col­lat­er­al­iza­tion,” Regi­nat­to said. “Cus­tomers bring a dol­lar, we give them 1 USDC, we keep that dol­lar. They bring USDC, we give them back a dollar.”

Circle’s approach is in stark con­trast to Ter­raform Labs’ failed algo­rith­mic sta­ble­coin Ter­raUSD (UST). Cir­cle backs USDC with a mix of cash and US Trea­surys, while UST sought to main­tain its dol­lar peg via arbi­trage and a com­pli­cat­ed mint­ing and burn­ing process involv­ing a sec­ondary token, LUNA.

Terra was crypto’s ticking time bomb

Ter­raform Labs’ bom­bas­tic founder Kwon had tried to rein­force UST’s via­bil­i­ty by amass­ing more than $3 bil­lion in bit­coin. This wasn’t tech­ni­cal­ly col­lat­er­al to back UST, but cryp­to to be spent on “defend­ing” the stablecoin’s peg if it start­ed to shake.

Still, UST col­lapsed from $1 to as low as $0.04 ear­li­er this month. LUNA, on the oth­er hand, fell from more than $86 to a frac­tion of a cent. More than $46 bil­lion had been vapor­ized from UST and LUNA’s com­bined mar­ket cap­i­tal­iza­tion in just four days.

“Luna/Terra was clear­ly the largest tick­ing time bomb [in the cryp­to space], cer­tain­ly the most frag­ile project,” Carter said.

Carter described Terra’s non-col­lat­er­al­ized design as “reck­less finan­cial engi­neer­ing,” and labeled its demise pre­dictable for those who “had a bit of per­spec­tive.” Terra’s algo­rithms were veiled in com­plex­i­ty, even delib­er­ate­ly so, mak­ing it dif­fi­cult for onlook­ers to inves­ti­gate and under­stand how they were sup­posed to work.

“Peo­ple couldn’t speak out against it because [Kwon] was so vocal on Twit­ter. There was a sense that you don’t want to offend your indus­try peers who had invest­ed in Ter­ra — there were enor­mous incen­tives to not inves­ti­gate,” Carter added.

Mak­er­DAO lead devel­op­er MacPher­son agreed that Terra’s design was reck­less, “pret­ty much from the start.” UST’s implo­sion empha­sized the need for sta­ble­coins to be col­lat­er­al­ized, MacPher­son said. It’s why Mak­er­DAO chose to over­col­lat­er­al­ize its sta­ble­coin DAI (cur­rent­ly by 164%), “so that users can be cer­tain they can always trade DAI for a dollar.”

Stablecoins are crypto’s killer app

Pan­el host Kate Rooney, of CNBC, asked Visa’s Gu how the finance giant felt about the Ter­ra fias­co. Gu said Visa wants “inter­est­ing use-cas­es” and its focus in the sta­ble­coin space is on fiat-backed dig­i­tal cur­ren­cies. Visa also stud­ies projects that uti­lize on-chain col­lat­er­al — a fan­cy term for cryp­to-backed sta­ble­coins such as MakerDAO’s DAI.

“We must think about how these dif­fer­ent projects are being con­struct­ed — safe­guards and stan­dards are impor­tant for con­sumers, retail investors and insti­tu­tions alike,” Gu said.

It’s impor­tant to under­stand how sta­ble­coin reserves are audit­ed and who mod­els and tests their sys­temic risks, she said, stat­ing that “even the safest assets can have risk.”

Frax founder Kazemi­an agreed, despite his stablecoin’s reliance on a frac­tion­al algo­rithm to main­tain its peg — although it’s designed some­what dif­fer­ent­ly to Terra’s UST. Frax is cur­rent­ly 89% col­lat­er­al­ized, with the remain­ing 11% main­tained by algo­rithms that gen­er­ate val­ue by inter­act­ing with var­i­ous decen­tral­ized finance (DeFi) protocols.

Kazemi­an said: “This is why Frax’s col­lat­er­al­iza­tion is entire­ly on-chain. Its col­lat­er­al­iza­tion is adjust­ed by an algo­rithm, and you can see the amount of debt and liq­uid­i­ty across lend­ing mar­kets. You can’t just do a lot of these things and hope for it to work out for the best: You paint a tar­get on your back.”

Some believe that CBD­Cs (cen­tral bank dig­i­tal cur­ren­cies) could one day fill the gaps in the sta­ble­coin mar­ket. Visa’s Gu cit­ed a recent Bank for Inter­na­tion­al Set­tle­ment study that found nine out of 10 CBD­Cs are research­ing and active­ly exper­i­ment­ing with CBD­Cs. Unlike sta­ble­coins, CBD­Cs will have the same sta­tus as oth­er cen­tral bank mon­ey, that is, full con­vert­ibil­i­ty to oth­er forms of legal ten­der currency.

MakerDAO’s MacPher­son didn’t have strong opin­ions about CBD­Cs, but if they come on-chain they could poten­tial­ly serve as col­lat­er­al for decen­tral­ized sta­ble­coins, he said.

Circle’s Regi­nat­to was a lit­tle less positive.

“Cen­tral banks don’t come across as the type of orga­ni­za­tion that could oper­ate these mech­a­nisms at scale,” he said. “Frax, Mak­er, Cir­cle, these are very com­pli­cat­ed to operate.”

Regi­nat­to also explained that Cir­cle believes in the per­mis­sion­less nature of pub­lic blockchains, stat­ing that the firm nev­er signed a deal with Mak­er and Frax, but both projects lever­age USDC to col­lat­er­al­ize their tokens.

But the most scathing cri­tique of the CBDC con­cept came from Carter, who labeled sta­ble­coins “an incred­i­ble con­sumer product.”

“Sta­ble­coins are crypto’s killer app so far, no ques­tion. They’ve been respon­si­ble for great trans­ac­tion­al auton­o­my,” Carter said, before stress­ing that pri­va­cy is incred­i­bly impor­tant when it comes to cash in a dig­i­tal con­text. Pol­i­cy­mak­ers are con­sid­er­ing the pri­va­cy pit­falls of putting dig­i­tal dol­lars on an immutable ledger, but Carter was skep­ti­cal that they would ulti­mate­ly choose to emu­late the rel­a­tive anonymi­ty of cash.

“No gov­ern­ment is going to give that to us, no CBDC plan is sin­cere about that…We have to look at the sta­ble­coin sec­tor for that.”


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  • David Canel­lis

    Block­works

    Edi­tor

    David Canel­lis is an edi­tor and jour­nal­ist based in Ams­ter­dam who has cov­ered the cryp­to indus­try full time since 2018. He’s heav­i­ly focused on data-dri­ven report­ing to iden­ti­fy and map trends with­in the ecosys­tem, from bit­coin to DeFi, cryp­to stocks to NFTs and beyond. Con­tact David via email at [email pro­tect­ed]

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