Key Takeaways
- The panelists of the Permissionless Panel agreed that Terra, an algorithmic stablecoin’s design is reckless.
- Terraform Labs founder Do Kwon originally was scheduled to appear in front of 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.
Circle’s vice president for product management Joao Regiatto revealed that the Boston-based stablecoin company had redeemed over $61 billion in 2018. This was during a discussion panel at Blockworks’ Permissionless event on Wednesday, held in Palm Beach.
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.
The panel also included Nic Carter from Castle Island Ventures, Catherine Gu, Visa’s Head of CBDC and Protocol, Sam MacPherson and Frax’s Sam Kazemian. Terraform Labs’ founder Do Kwon had originally been scheduled to speak on the panel.
“Our model is super boring, it’s very, very simple: full collateralization,” Reginatto: “Customers bring a dollar, we give them 1 USDC, we keep that dollar. They bring USDC, we give them back a dollar.”
Circle’s strategy is in stark contrast with Terraform Labs, which failed to create a stablecoin based on an algorithm. TerraUSD (UST) Circle’s USDC is backed by a mixture of US Treasury bills and cash, while UST tried to maintain the dollar peg through arbitrage, a complex minting and burn process, and a secondary token called LUNA.
Terra is crypto’s time bomb
Terraform Labs founder Kwon, a bombastic figure who is known for his brash personality, had accumulated more than $3 billion worth of bitcoin to ensure the viability of UST. The crypto was not technically collateral backing UST. It was simply crypto that could be used to buy things. “defending” The stablecoin peg will start to move if the coin starts shaking.
UST fell from $1 down to $0.04 in the first week of this month. LUNA’s value plummeted from $86 up to a fractional cent. In only four days, UST’s and LUNA’s market cap had fallen by over $46 billion.
“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,” Those who predicted its end have labelled it as predictable “had a bit of perspective.” Terra’s algorithms, which were deliberately complex, made it hard for observers to understand and investigate how they worked.
“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’s lead developer MacPherson also agreed Terra’s design is reckless. “pretty much from the start.” MacPherson stated that the UST implosion highlighted the need to collateralize stablecoins. MakerDAO decided to overcollateralize their stablecoin, DAI (currently 164%). “so that users can be certain they can always trade DAI for a dollar.”
Crypto’s killer application is stablecoins
Kate Rooney from CNBC asked Visa Gu what the financial giant thought about Terra. Gu said Visa wants “interesting use-cases” Visa also studies projects that utilize on-chain collateral — a fancy term for crypto-backed stablecoins such as MakerDAO’s DAI. 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.
The importance of understanding how stablecoins are audited, and the models that test their systemic risk, was stressed by her. “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 has 89% of its value collateralized. The remaining 11% is maintained by algorithms which generate value through interaction with different decentralized finance protocols (DeFi).
Kazemian: “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.”
CBDCs are central bank digital currencies that some believe could fill up the gaps of the stablecoins market. Visa’s Gu quoted a Bank for International Settlement report that revealed nine of ten central banks were actively researching CBDCs and experimenting. CBDCs are not stablecoins. They will be treated the same as any central bank money. This means that they can convert to all forms of legal currency.
MacPherson of MakerDAO didn’t express strong feelings about CBDCs. But if these coins were to be added, they might serve as collaterals for stablecoins that are decentralized, he explained.
Circle’s Reginatto rated a bit lower.
“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 further explained Circle’s belief in permissionless public blockchains. He said that Maker and Frax never had a formal agreement with the company, and that both used USDC tokens to secure their projects.
Carter’s most damning critique of CBDCs was when he called stablecoins “fake money”. “an incredible consumer product.”
“Stablecoins are crypto’s killer app so far, no question. They’ve been responsible for great transactional autonomy,” Carter stressed that privacy was a major concern when dealing with digital cash. Carter said that policymakers were considering privacy risks of placing digital dollars in an unalterable ledger. However, he was skeptical they would choose to mimic the relative anonymity provided by 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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