Special Edition: Crypto, Terra and Defi
Special Edition: Crypto, Terra and Defi
Crypto winter begins
This week
1. Crypto Armageddon
2. Terra stablecoin collapses: OK Boomer!
3. Defi gets slammed and isn’t fit for Web3 and the Metaverse
PLEASE NOTE: today’s issue will have more pictures and less writing. This week's dramatic events unfolding in crypto markets made me produce far more graphical material. So for today’s issue, more pictures, and fewer words.
1. Crypto Armageddon
This is a day that many saw coming.
Major cryptos are all in decline with new prices lows
The Crypto market is now down nearly $2tn off its peak
Bitcoins’s 50+% crash
Stablecoin Tether broke its dollar peg
40% of bitcoin owners losing money,
Pain levels following the Terra disaster are peaking
I feel for those losing money, nor do I oppose crypto, but how much of this was greed?
Why the crash?
Not just bad news but indications of rampant corruption in crypto markets:
1) Failure of Terra algorithmic stablecoin dropping some $50bn in market capitalization hit the market hard. (more on Terra next section)
2) Reports that Terra founder Do Kwon launched another failed algorithmic stable coin a few years ago! “If at first, you don’t succeed, try, try again!”
3)Bitcoin’s ongoing slide, which, while exacerbated by Terra, was well underway before Terra’s fall.
4)Reports this week that 40% of crypto owners are now losing money on their investments.
5) Coinbase, which is down 78% for the week, will have the rights to your crypto if they ever go bankrupt!
6) Reports from SEC head Gary Gensler that crypto exchanges are “trading against their customers often because they’re market-marking against their customers.”
One of Bitcoins major selling points was that it would hedge inflation,
Several months into an inflationary period Bitcoin shows no hedge ability.
Take away this selling point and you reduce attractiveness as an asset class.
Another Bitcoin selling point was that it was non-correlated with markets.
Chart below shows near perfect correlation with S&P
If Bitcoin correlates with traditional assets….why bother?
Tether stablecoin dropping its peg on Thursday the 12th also contributed to the sense of impending doom!
Coinbase loses 71% of value in 1 week
But in a report it revealed that customers accounts were subject to confiscation in the event of bankruptcy!
Meanwhile SEC’s Gensler is claiming exchanges are trading against clients!
The week’s best advice came from Binance CEO “CZ”: “go back to building real products that people use”
2. Terra algorithmic stablecoin collapses: “OK Boomer”
Algorithmic stablecoin Terra broke its peg on Tuesday, May 10 and was one of several triggers for the ensuing crypto crash. Terra is an “algorithmic” stable coin a type of stablecoin that I have argued is unstable. An “I told you so” moment for regulators and me!
For the last year, regulators have been ranting about stablecoins with claims that they could bring financial instability. They were mostly met by the same response that I get from the crypto crowd: “OK Boomer.”
So isn't it ironic that on the same day that the Fed published its “financial stability report” warning about stablecoins, Terra melted down!
My warning about algorithmic stable coins and Terra on April 6th. All financial products with the word “algorithm” in them should be avoided at all costs!
We all should have learned that lesson from the Global Financial Crisis and the failure of “CDOs” or collateralized debt obligations.
Terra’s melt down has been referred to as the single largest catastrophe that cyrpto has ever seen. $45bn in market capitalization has been wiped out.
My explanation of how Terra works will be intentionally incomplete: Terra is a stablecoin pegged to the dollar which runs on a blockchain network. That blockchain network issues Luna as its governance token and the two are linked.
To maintain Terra’s dollar peg, the algorithm either mints or burns Luna tokens which are used to buy or sell Terra to keep its price stable. An algorithm controls the minting or burning.
With no further explanation, two questions should come immediately to mind:
1️⃣ Where’s the real money like dollar or bitcoin that backs it up? To which I respond, there isn’t any.
2️⃣ Who checks and validates the algorithm? My answer, you just have to trust them!
In February of 2022, Terra announced that it would add Bitcoin reserves to back up its algorithms. In essence, creating a hybrid algorithmic decentralized coin with centralized collateral.
While Terra is “algorithmic” it also has reserves. Here is a quick look at their sufficiency when depleted on Wed the 11th:
UST stablecoin has 18bn in outstanding
Peak reserves, May 3 of $4 tn leverage: $1 : UST 4.5
Current reserves $196 mn leverage: $1 : UST 92
Clearly when it comes to leverage CDOs had nothing on Luna.
The irony is that the Fed issued its Financial Stability Report on the same day Terra collapsed! As usual regulators and regulations are considered unwanted and unneeded by the crypto community!
Chart showing concern for stablecoins from the Fed’s stability report
Crypto crowd has denounced regulators as boomers for years!
Maybe the boomers knew something crypto fans did not?
“Stablecoins are also vulnerable to runs, and the sector continues to grow rapidly”
“These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins.”
Mike Novogratz a leading crypto proponent can remember Luna and Terra forever!
Novogratz Pumped Luna then dumped it in March before the plunge. Proving that crypto billionaires don’t care how much you lose!
Adding to the problems it is now clear that Terra’s founder “Do Kuan” was the founder of another stablecoin that failed! Proving the adage “If at first, you don’t succeed, try, try again!”
Basis Cash collapsed but was worth a mere $54 million! Small change but a clear practice run for Terra!
Why did Terra collapse?
Selling Terra created a feedback loop of panic.
When Terra broke the dollar peg, the community sold both the Terra coin and companion Luna coin.
Luna was supposed to go up if Terra needed support but fell because the algorithm was broken by fear!
Human fear trumps algorithms every time!
Amazingly the Terra community, which refers to themselves as “Lunatics,” is still trying to save the Terra stablecoin, which is now no longer traded on major marketplaces. Terra still has reserves and the question now is where did Terra’s $3.5bn in bitcoin reserves go!
My take is that we’ll never see this money again and it will disappear as fast as Terra tanked! Bitcoin has been traced to exchanges where it disappeared! Are you suprised? I’m not!
I believe that Do Kuan and his team should be forced to remain in Singapore until this money is found. Terra was a highly sophisticated coordinated scam not an innocent failure!
3. Defi gets slammed and isn’t fit for Web3 or the Metaverse
DeFi gets slammed with the crypto and Terra collapse, but why are hacks and greed the norm? DeFi is such a mess; how will they use it in Web3 and the Metaverse?
Defi is taking it hard with ”total value locked” (TVL) plummeting 56% off its peak to $112bn.
Terra was $30bn of DeFi’s $230bn TVM until about a month before it crashed.
DeFi tokens are down 71% for the year exceeding the underlying Ethereum token decline of 43%, showing not all of the decline is attributable to crypto.
Defi is getting slammed due to persistent hacks, costing $1.6 bn.
$1.57 Bn in DeFi hacks are devastating
Hacks through May 4
Losses exceed all of 2021, $13 mn lost per day
Do you think regulation is required?
Web3 and the Metaverse
Now what really bothers me is that not a day goes by without me reading how Web3 and the Metaverse will be built on DeFi. Really are you kidding me?
Given the levels of raw corruption, hacks, and scams like Terra, how are we supposed to build the internet of the future on this? It’s nice to say that “decentralized” is superior to centralized I read this ever day in the crypto world.
Still, with the obvious flaws in these systems how are we supposed to use them? I think that the hype associated with all of these products is far outstripping their ability to deliver real service.
My point? If you’re betting on Web3 and the Metaverse, expect delays!
What is required:
Self-regulation and real regulation to show this is not just the Wild West.
Testing and verification services to show that DeFi is built on sound foundations.
A crypto press that does more than praise every corrupt DeFi protocol!
As it stands now DeFi is not fit for purpose!
I have a more in-depth article on Defi here:
Thanks for reading
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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