TerraUSD: ‘Stablecoin’: Stable Like an Elephant on a Spider’s Web | Opinion

The stablecoins or “stablecoins” are not currencies and are not stable either. They are active (tokens) issued in blockchain by a central entity (such as Tether or Terra) whose value is allegedly tied to an external value, such as the dollar, euro or gold. An exotic virtue in a world crossed by volatility such as that of cryptocurrencies. The stablecoins they have been promoted as a safe bet with double guarantee: on the one hand, against the fluctuation of cryptocurrencies and, on the other, against fiat inflation. For this reason, they have become popular at exchange points, becoming the bridge between cryptocurrency and fiat money. Its market value is 30 times greater than that of two years ago, from 5.6 billion dollars in 2019 to 157 billion at the end of 2021. They are the column of the materiality of the cryptocurrency market. The problem is that their value is completely inflated and they have very little liquidity.

Theoretically, entities that issue stablecoin They guarantee their value by storing an equivalent amount of fiat currency in a bank. Like in a casino, where the value of each chip in circulation corresponds to an equivalent amount of real money in the box. Only the casino is obliged to show the box at any time to prove that it has the money and, when the customer wants to go home, he is obliged to exchange his chips for their equivalent amount in real money. This is important, because those chips are worth nothing outside of the casino. The entities that issue stablecoin they’re not exactly bound to any of those things.

Tether would be the Lehman Brothers of cryptocurrencies. Although you may not have heard of it, Tether (USDT) is bigger than bitcoin. Theoretically, it is backed 1:1 by the dollar. his catchphrase is “one dollar tether (USDT) is always equal to one dollar (USD)”. Now they say their reserves include “traditional currency and cash equivalents and, from time to time, may include other securities and loan claims made by Tether to third parties.” The truth is that there is no way to verify it because the bank that keeps the real money is in the Bahamas. In the Lehman Brothers case, the auditors were incompetent and/or corrupt. In this case, there is no auditor.

Even worse. The investigation of Panama Papers revealed that the owners of Tether were also the owners of Bitfinex, the exchange they used to move money around to throw regulators off the scent. A notable investigation by Bloomberg revealed that they had no dollars to back their currency, and have paid fines to the treasury for using other cryptocurrencies as backing to shore up its value. Despite the numerous investigations that it has open in the US, it is believed that the Biden Administration prefers to wait for it to sink on its own rather than close it. They don’t want to be the target of the wrath of millions of disillusioned small investors, who might blame the government for the collapse, rather than bear the consequences of their bad investment.

In the case of TerraUSD it is a “stablecoin algorithmic”, which means that its parity with respect to the dollar is algorithmically guaranteed by a series of smart contracts, orders stored on the blockchain chain. A month ago it was one of the most valuable cryptocurrencies in the world. But in the last 48 hours, the contracts stopped achieving their objective, losing a lot of investors in the process and, with them, 96% of its value. It is possible that its collapse is linked to the fall of Bitcoin, which has been on the decline since November and is now at the value it was in December 2020. It is also possible that it is linked to the holding of other stablecoins such as Tether.

The market has been in free fall since November. If it were a truly decentralized market, the effect would be very different (theorized by Paul Baran in Centralized, Decentralized and Distributed networks, in 1964). In such a centralized and tangled market, every blow is felt in all corners of the system. All those who entered the market with the Gamestop phenomenon, when crypto fever invaded popular culture in June 2021, are losing money. But, if this is a Lehman Brothers moment, the meltdown is likely to spill over into the crypto community.

In its “risks on the financial stability of crypto assets” report, published in February this year, the Financial Stability Board, which brings together, among others, the European Central Bank, the European Commission, the International Monetary Fund and the World Bank , warned that the stablecoins they are capable of creating points of structural vulnerability due to their “increasing interconnection with the traditional financial system”. In other words, if there are banks and other financial entities among the unwary, we will all pay for this collapse, even if we don’t have even a miserable NFT.

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