The fall of the Terra environment and its stablecoin, the UST, has strongly impacted the crypto market. Do stablecoins, supposed to be pegged to another cryptocurrency or fiat currency like the dollar to avoid the volatility effect, still have a future? If they should be part of the future, it is better to handle them with care.
A vertiginous fall of almost 100%. While trading at around 110 euros at the end of April, the LUNA, a Terra protocol token, collapsed and is now worth nothing (0.0001292 euro). A crash that led to that of the UST, algorithmic stablecoin of the Terra environment, supposed to be worth, whatever happens, a dollar. As a reminder, a stable cryptocurrency is a cryptocurrency whose price is pegged to another cryptocurrency or fiat currency. Unlike other cryptoassets whose price is very volatile, stablecoins do not normally have this problem. Within the framework of the UST, it is the LUNA which acted as a balance. The fall of one therefore dragged down the other, the UST being worth a little more than 8 cents today dollar.
The case has had a significant impact, to the point that certain political figures have already taken up the subject, like the leader of France Insoumise, Jean-Luc Mlenchon.
A performance that is too good to be true
Are stablecoins a vast scam? Before throwing everything into the fire, it’s good to take a look at Terra. Through the Anchor protocol, UST holders were invited to deposit their money on the platform. This allowed them to receive interest. Under this protocol, UST holders were promised an annual return of almost 20%. The economic model was not sustainable, judge Franois Laviale, director of management at Alphacap Digital Asset Management. In our analysis, we had anticipated this coming crisis, quite simply because we cannot distribute such a high return. What posed a problem is that when you reach 40 billion capitalization, you can not continue to give 20% return by taking on equity.
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Jonathan Herscovici, founder of the broker Stackinsat, believes that the fall of Terra Luna is absolutely no surprise given the unstable balance behind this protocol. More generally, the problem is that some have made people believe that they can become a millionaire in three weeks thanks to crypto. People come into crypto thinking they can make big gains easily and don’t care about the fundamentals. In the case of Terra, many were taken in by marketing that offered 20% returns, without really understanding what was behind it.
Stablecoins have a role to play in crypto
So is this really the end of stablecoins? Some are said to be safer, because backed (collatraliss) to the dollar. This is the case for example of the BUSD or the USDT. The promise is therefore that for each token of these assets, a dollar is put in an account. An equation supposed to ensure the stability of these cryptos, even if there again, problems exist, like the opacity of certain players such as Tther, which offers USDT.
For Franois Laviale, the future will pass anyway by this type of assets: The stablecoins remain a class of essential crypto-assets in the ecosystem. It would be very difficult to do decentralized finance (DeFi) by having only volatile cryptos. We really need stablecoins to support the development of decentralized finance.
If the stablecoins collateralized by dollars seem today a safer alternative, the DAI, another stablecoin algorithmic but collateralized by Ether, also finds favor in the eyes of our stakeholders. It behaved very well during this market downturn, judge Franois Laviale. The DAI has been around for a long time and has proven itself.
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The digital euro, the solution?
While Jonathan Herscovici concedes that stablecoins can have real utility, he also believes that the operational set-up is very complicated. For him, the stablecoin the least worst would be the digital euro created by the ECB. This would indeed make it possible to have a trusted stablecoin which should be less opaque than the USDT, the systematic risks of which are major for the industry.
The problem with the euro-digital is that there could be a certain number of liberticidal derivatives, as we observe with the digital Yuan, notes the founder of Stackinsat, who organizes the third edition of Surfin’ at the end of August. Bitcoin, the biggest conference on the subject in Europe. Indeed, while the crypto environment has been built on the notions of freedom and privacythe idea of having a state that could control and have an eye on all of our transactions goes against the philosophy of bitcoin.
Handle stablecoins with great care
If stablecoins can still have a use, then they should be handled with care. Better to look seriously at the project before investing in it. Like Warren Buffet who advocated never investing in a company that you cannot understand, Franois Laviale does not say anything else: If you do not understand how a crypto can offer a return of 20%, it is better not to go there. If we don’t understand a business model, it’s often because it’s not sustainable.
Another tip: if crypto-assets can be a way to diversify your savings, it is better to invest what you are ready to lose. And even within your crypto portfolio, it is better to diversify your assets and not invest everything in the same project.
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For Jonathan Herscovici, there is no stable except Bitcoin. The one who defines himself as a maximalist bitcoin (believing in Bitcoin for its already demonstrated usefulness in opposition to other cryptoassets Ed), warns against this false image of easy money: The purchase of crypto-assets other than Bitcoin should concern 1% of the population, which takes time and has the experience to do so. Crypto is like a biotech stock. In these actions, we invest in the hope that biotech will, for example, one day release a revolutionary vaccine. But perhaps this vaccine will never see the light of day. With altcoins, it’s the same. It’s a bet on the future, but which does not have a 100% chance of succeeding. Conversely, Bitcoin already has a use, for example, in El Salvador or the Central African Republic, which have recognized it as legal currency.
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