The unbearable instability of stables
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Bitcoin observed a steady recovery this week, stretching above $42k following Monday’s $38k lows. The Luna Foundation Guard has continued its accumulation of BTC, adding another 2,6k BTC to its holdings late last week. It’s becoming increasingly clear that Luna’s strategy is gaining traction across the market, with the narrative surrounding “stables 3.0” gaining significant momentum in recent weeks.
Competition abounds
As discussed previously, stablecoins first emerged as tokens 1:1 backed by their underlying fiat counterpart (USD, EUR, etc.). However, the inherently centralised nature of such a system has been heavily critiqued in a space based on an ethos of decentralised transacting. Algorithmic stablecoins, like Terra’s UST, or Time Wonderland’s infamous MIM, departed from collateralized backing, instead opting for an approach that regulates stablecoin value algorithmically, with no other backing.
Do Kwon’s pivot to a hybrid model with BTC backing for UST has ushered in a new era for stablecoins, which, if implemented correctly, could bolster the strength and stability of stablecoin transacting in crypto.
As tends to be the case, fresh ideas catch on like wildfire in the vast expanse of Web 3 development. Recently, prominent Layer-1 protocol NEAR announced the launch of its own stablecoin, USN, in an attempt to capture value from theTerra ecosystem. However, NEAR is far from the only chain entertaining the same idea.
On Thursday, Tronix (TRX) founder, Justin Sun, entered the arena with force. The controversial crypto heavyweight has announced plans to launch USDD on his native chain by employing a very familiar sounding strategy - USDD will be backed by both TRX and reserves of crypto totalling $10B.
Final thoughts
While the idea of crypto-backed crypto seems recursive in a sense, this freshly-injected dynamic could serve to showcase crypto’s utility as a hard asset capable of acting as solid collateral. Further, it goes without saying that the emergence of this approach, and the funds being deployed to implement it across chains, adds astounding buy pressure to the market. As we’ve already seen with Do Kwon’s staggered accumulation, the market’s current sensitivity has responded emphatically to institutional accumulation. Though one could reasonably consider this a significant catalyst for a renewed bullrun, the underlying driver is cause for concern. Institutions buying crypto in order to collateralise stablecoins is hardly organic. Further, given the novelty of this approach, we find ourselves in unchartered waters. Whether this iteration of stablecoin strategy actually proves sustainable will only become clear on a far longer time horizon. And should they fail, the market-wide implications would be far-reaching given how vital stablecoin transacting is in the space.
Only time will tell.
Presented without comment