In April 2022, we published the article on Hackernoon in which we warned the community of the risks around stablecoins. We mentioned that all 3 types of stablecoins (fiat-backed, crypto-collateralized, and non-collateralized (also referred to as algorithmic stablecoins) were not stable by their nature, especially the last 2 types. And what did we see at the beginning of May?…
The crypto market experienced a disorderly collapse that has raised questions about the stability of the entire crypto ecosystem. In days, cryptocurrencies took a massive nosedive, destroying about $1.8 trillion in circulating value.
Was it a black swan, inevitability, snowball, or something else?
If anything, the crash has proven that “Stablecoins aren’t so stable after all.” The collapse exposed the main systemic weakness of cryptocurrencies – almost all of them are not backed by tangible assets, such as goods, cash, or bonds.
TerraUSD ($UST) was supposed to be a role model for other tokens. TerraUSD’s model was distinctive. It relied on a complex mathematical algorithm to maintain its dollar value. Unlike other stablecoins, $UST was backed by its sister-token Luna to keep the dollar peg in check. Terra’s $1 value slipped to $0.9 as “faith in that model evaporated.” The violent collapse of UST ended when it reached $0.05. Looking through Terra’s Luna token on Etherscan, one investor lost $1.03 billion and at least four other investors lost $300-400 million. They could have avoided these crushing losses by holding HAI instead. Although the founder of Terra Do Kwon makes regular tweets stating his intention to bring Terra back to life, currently, almost all investors have exited TerraUSD and Luna.
Things didn’t go as planned for other stablecoins too. Even the most institutionalized of all stablecoins has been proven vulnerable to market panic. The biggest stablecoin with a peak market cap of more than $80B, Tether, was supposed to be fully collateralized. However, Tether also sank below $1 peg to $0.95, confirming that Tether’s claimed dollar-based reserves are not enough to guarantee the $1 peg. However, Tether is still very unlikely to go to zero.
The violent crumbling of TerraUSD and Tether has cast doubt on the extent of stability behind “stablecoin.” In theory, stablecoins are supposed to track fiat currencies. The whole point of stablecoins was to combine the best of the two worlds: take advantage of blockchain and p2p while offering less volatility than other cryptocurrencies like BTC and ETH. Yet, the crash of Terra gave another opportunity for the financial system to reiterate the idea that most cryptocurrencies are too volatile for anything except speculation.
On May 11, the FCA reminded consumers of the risks of investing in crypto assets, “if you buy cryptoassets, you should be prepared to lose all the money you invest.” It’s now difficult to tell whether this dark warning is an overstretch. Indeed, stablecoins may continue their crash.
For the entire cryptocurrency market, the size of Terra is relatively small. Yet, Terra’s fall has galvanized concerns over cracks in other coins. It’s no wonder that the entire market of stablecoins is too unstable right now. On hearing Terra’s crash, investors rushed to pull $10B from Tether. This created even more uncertainty for hundreds of smaller stablecoins. For example, FRAX ($2B mcap) fluctuated between $0.99 and $1.05; MIM ($1.8B mcap) fluctuated between $0.99 and $1.02; and FEI ($500M mcap) ranged between $0.97 and $1.05. These fluctuations will continue as we may be heading towards deeper or more lasting volatility in stablecoins. Stablecoins with less than $2B in mcap will remain at risk of a sudden collapse because their stability largely depends on the top four coins – USDT, USDC, BUSD, and DAI. For example, FRAX uses USDC in its collateral mechanism. Following TerraUSD crash, in the coming future, the holders of minor stablecoins may treat the visible depeg of any one of these major stable assets as a push to exit their crypto.
Some stablecoins follow the pattern of Terra. Terra announced a $10B BTC reserve fund two months before the crash. Tron, a company behind USDD stablecoin ($270M mcap), announced they would create a $10B reserve fund to back their coin. We already know where this pattern leads, and Tron is unlikely to have amassed enough reserves. USDD may be the next coin to crash.
The crypto market crash will speed up calls for regulation. The EU, UK, and US authorities all became more vocal in the past days. Yet, there is genuine uncertainty about the primary motivation behind regulation. Is it consumer protection or systemic stability? Either way, institutional and private crypto enthusiasts should be prepared for significant changes.
UST depeg and TerraLuna ultimate collapse have led to serious panic among individual crypto investors as well as corporate players. Considering such a great level of uncertainty, projects are looking for long-term alternatives for stablecoins to diversify their portfolios.
At the end of April 2022, we introduced a new cybersecurity investment asset ETD – engineering team day, the alternative for stablecoin backed by Hacken experts’ time.
By investing in ETD, projects can make sure that they will be secured through Hacken audits and won’t need to worry about a possible next stablecoin crash.
You can find a more detailed description of this asset in the ETD introductory article.
*Dyma’s adviсe is always justified!
ETD is a secure investment asset backed by the most valuable asset time. Time is not volatile. When speaking about the cost of work time, according to data on the average annual wages provided by OECD, for the last 20 years, its real value has increased in all developed countries. Taking into account the rapid development of technological sectors, including Web 3.0, the growth of wages received by IT and cybersecurity specialists may be even higher compared to the other economy.
An increase in the level of wages received by specialists leads to an increase in the price of services they provide. Buying ETD allows projects to fix the cost of a smart contract audit at the time of purchase.
Investing in crypto remains a high-risk activity. During the period of uncertainty, we strongly recommend investors diversify their portfolios by adding new long-term investment assets such as the one offered by Hacken.
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