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

  • Permissionless Panelists Agreed Algorithmic Terra’s Doomed Design Was Reckless
  • Terraform Labs founder Do Kwon was originally scheduled to appear on stage alongside his detractors

Circle repurchased $7 billion from USDC last week as markets reacted to Terra’s demise, underscoring how essential stablecoin backing is in times of intense volatility.

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

This means Circle processed over 11% of its total redemptions for an entire year in just one week – a week that saw $280 billion drained from the cryptocurrency’s total market capitalization.

Other panelists included Nic Carter of Castle Island Ventures, Visa CBDC and Protocol Manager 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: a full guarantee,” 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 stands in stark contrast to the failure of Terraform Labs’ algorithmic stablecoin TerraUSD (UST). Circle is backing USDC with a mix of cash and US Treasuries, while UST has sought to maintain its dollar peg via arbitrage and a complicated mint-and-burn process involving a secondary token, LUNA.

Terra was the ticking time bomb of crypto

The explosive founder of Terraform Labs, Kwon, had tried to boost the viability of UST by raising over $3 billion in bitcoins. This was technically not a guarantee to support the UST, but the crypto to spend to “defend” the stablecoin’s peg if it started to shake.

Still, the UST crashed from $1 to $0.04 at the start of the month. LUNA, on the other hand, went from over $86 to a fraction of a penny. Over $46 billion was vaporized from the combined market capitalization of UST and LUNA in just four days.

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

Carter described Terra’s unsecured design as “reckless financial engineering” and called its demise predictable to those with “a bit of hindsight”. Terra’s algorithms were veiled in complexity, even deliberately, making it difficult for viewers to investigate and understand how they were supposed to work.

“People couldn’t object because [Kwon] was so vocal on Twitter. There was a sense that you didn’t want to offend your industry peers who had invested in Terra – there were huge incentives not to investigate,” Carter added.

MakerDAO lead developer MacPherson agreed that Terra’s design was reckless, “pretty much from the start”. The UST implosion underscored the need to secure stablecoins, MacPherson said. That’s why MakerDAO chose to over-collateralize its DAI stablecoin (currently by 164%), “so that users can be confident that they can still trade DAI for a dollar.”

Stablecoins are the app that kills crypto

CNBC panel host Kate Rooney asked Visa’s Gu what the financial giant thought of the Terra fiasco. Gu said Visa wants “interesting use cases” and is focusing in the stablecoin space on fiat-backed digital currencies. Visa is also exploring projects that use on-chain collateral — a fancy term for crypto stablecoins such as MakerDAO’s DAI.

“We need to think about how these different projects are built – safeguards and standards are important for consumers, retail investors and institutions,” Gu said.

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

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

Kazemian said, “That’s why Frax collateralization is all on-chain. Its collateral is adjusted by an algorithm, and you can see the amount of debt and liquidity in the loan markets. You can’t just do a lot of these things and hope it works out for the best: you’re painting 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 actively researching and experimenting with CBDCs. Unlike stablecoins, CBDCs will have the same status as other central bank currencies, i.e. full convertibility into other forms of legal tender.

MakerDAO’s MacPherson didn’t have a strong opinion on CBDCs, but if they came 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 seem like the type of organization that could make these mechanisms work on a large scale,” he said. “Frax, Maker, Circle, it’s very complicated to operate.”

Reginatto also explained that Circle believes in the permissionless nature of public blockchains, stating that the company has never signed an agreement with Maker and Frax, but both projects rely on USDC to guarantee their tokens.

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

“Stablecoins have been the killer app for crypto so far, without a doubt. They have been responsible for a lot of transactional autonomy,” Carter said, before emphasizing that privacy is extremely important when it comes to trading. is 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 money.

“No government will give us this, no CBDC plan is sincere about this… We have to look at the stablecoins sector for this.”

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  • David Canellis



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

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