Q:

A lot has happened in the last couple of weeks. What's your take on what has happened in the broader markets, and specifically, the stablecoin market?

A:

First and foremost, we saw a failed attempt in Luna to run an algorithmic stablecoin at a global scale. Since then, we've seen investors flee to regulated stablecoins that use a centralized asset-backed model. Let's call that a flight to safety.

It's not complicated why the algorithmic stablecoin failed. An algorithmic stablecoin is a synthetic asset that tries to peg its value to the value of something else – in this case, the dollar. You can peg gold to the dollar; you can peg baseball cards to the dollar, or anything else that is tradable or liquid. However, it can be challenging to maintain the peg when the price of the asset you're using for the peg fluctuates significantly. If the asset used to maintain the peg is a liquid asset, like gold, you can short the gold, and effectively, you have a peg minus the cost of the short.

If the value of gold goes down, you end up with more gold, and you still maintain the peg. If the value of gold goes up, you end up with less gold and maintain the peg. However, the problem with that model is that if the value of the gold goes to zero, you need an infinite amount of gold to maintain the peg. And that's what happened with terra luna. It failed because we ended up with a run on luna that created a positive feedback loop that meant they needed to add more and more and more luna to maintain the peg, which created more and more panic and kept driving the price down. It became impossible to maintain the peg as it approached zero, and, effectively, luna failed.

Q:

Do you think anyone was behind this?

A:

This wasn’t triggered by anything nefarious that we can see. In hindsight, it was a pretty unstable system because it used an asset that is relatively new and more volatile even than traditional crypto – more volatile than bitcoin or ethereum, for example.

It didn't take much to start the collapse. People earned crazy high rewards – upwards of 15% - 20% on their deposits via Anchor without most understanding, or trying to understand, how or why. And as we saw, that house of cards came crashing down. It doesn't mean that an algorithmic stablecoin is impossible. It just means, at the very least, that the way it was implemented using an unstable, new, illiquid asset as the base asset for the synthetic asset is not a good idea.

Q:

So, this wasn’t orchestrated in any way?

A:

I see no evidence that this was orchestrated. And quite honestly, it didn't need to be simply because of the fragility of the underlying asset. For example, if ethereum was the base asset instead of luna, I doubt this crash to zero would have happened because you wouldn't have the concentration risk.

Almost all of luna was used to maintain this peg. That's not a good idea. As people started taking money out of Anchor – not even in huge amounts, but enough to spook many large institutional holders – it quickly created a positive feedback loop. I don't think it took anything nefarious, deceitful, or an attack to initiate the collapse. It had more to do with the peg that shouldn’t have been based on this unit currency to begin with.

Q:

What now for the market, and where do you see it going? What lessons can we learn from this?

A:

We're clearly either in or headed into recession. All the key leading indicators point to a recession. I think the stock and crypto markets will be correlated for a few more weeks. And that has nothing to do with stablecoin markets. I believe we’re going to see a flight to safety because high-net-worth investors and other institutions need to report how they're storing their dollars in crypto and the counterparty risks. Retail traders will probably stick with tether for now, and I don't necessarily see a blowup there. Tether is now starting to report reserves and be a little more transparent than in the past. But for the crypto markets in general, I'm as bullish as ever.

Q:

Why is that?

A:

I think the correlation to the wider downturn will end sometime in the second half as the Fed tries to help subside some of the fear that's building by saying that they’re not going to raise rates and tighten credit as fast as we initially thought they would. They don’t yet seem to fully realize what's happening in the tech slowdown. Once they do, I think that the outlook for crypto and tech investing will become extremely bullish. And the network effects that have slowed over the past few weeks will pick up steam again.

Lastly, I think the future for the stablecoin markets and yield opportunities in crypto is bright. This is not the first major recession that the crypto markets have lived through. And it will become another check mark in the “stress tests” that crypto will have survived.


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