DeFi believers never said to die even after seeing Terra’s death

Believers in the future of decentralized financing are not giving up algorithmic stablecoins even after the spectacular fall of TerraUSD (UST), saying they are the key to a world without intermediaries like banks and brokerages.

“Algo will remain stable for the next five to seven years,” said Hassan Basiri, a portfolio manager at Archer who was an investor in Terra. “And it has to exist or else what are we doing in this place?”

DeFi has been one of the fastest growing sectors in crypto over the past few years, with many borrowing and lending applications offering double and triple-digit returns. Like most crypto projects, they rely on attracting a sufficient amount of transactions to keep blockchain networks running. The model has been seen to work until central banks begin to remove the Covid-era stimulus, begin to retreat into a hunger for risk, and raises questions about whether stimulus-based systems are sustainable.

The software crashed in early May with the intention of stabilizing the UST – so as to avoid the natural volatility of crypto pricing so that it could become a more reliable tool for transactions – the demand for Luna tokens could not be overcome. Although it was by far the largest algo stabilized coin with a market value of about 18 billion, it was one of about a dozen that failed or failed to maintain its dollar-to-dollar promised 1-to-1 peg.

Controversial crypto entrepreneur Justin Sun introduced the USDD token to his Tron network just before the fall of UST, among a handful of surviving algo stablecoins.

Sun defended the project in an interview with Bloomberg News, saying he saw the need for a stablecoin free from regulators as one who had experienced the collapse of the crypto market in China after the country announced sanctions on the sector.

“If regulators decide to ban Stablecoin tomorrow, as China did when it announced a ban on crypto, it would pose a big risk to the entire crypto system,” Sun said. “We must have a stablecoin that is not controlled by any third party outside of crypto”, referring to popular stablecoins such as USDC which are backed by traditional assets such as cash and short-term securities.

According to Sun, USDD went live on the Tron blockchain in early May. It can be used in Ethereum and Binance smart chain blockchain through so-called bridging software. Stablecoin uses an arbitration process similar to the one Terra uses to maintain his peg. For example, when 1 USDD falls below $ 1, traders can make an immediate profit by sending 1 USDD in exchange for a ট্র 1 worth of Tron in the Tron blockchain, with arbitrage incentives designed to bring back the value of the network’s native token, USDD. 1.

Terra has shown that it is easier to integrate such algorithmic programming to stabilize a token, mainly because stablecoin is dependent on investors who believe that its sister will continue to appreciate cryptocurrency.

“If you really want to make these things, you have to have this kind of sharp technical ability, but you also have to have this wonderful vision in your eyes,” said the young Chitra, founder and CEO of Gauntlet, a financial modeling platform for Crypto. “Because you have to somehow believe that you are going to overcome all the failures that have happened historically.”

Sun agrees that Terra’s failure shows the flaws of the algorithmic stablecoin, but says it allows new projects to be adjusted. The USDD aims to raise $ 10 billion through the Tron DAO Reserve – what it calls an “alliance” of market participants, including Almeida Research and the Amber Group – to protect the USDD’s peg. This is a setup similar to the Singapore-based non-profit Luna Foundation Guard by Terra’s main developer, Do Cowan.

“Our definition of an algorithmic stablecoin is not that it is free from any human,” Sun said. “We want something without any connection to the banks or any stablecoin associated with the assets managed by the bank.”

Regulators around the world are already concerned about stablecoins as a source of risk to the financial system. U.S. Treasury Secretary Janet Yellen recently said that Terrer stressed the urgent need for the melting gardel and said it would be “extremely appropriate” for lawmakers to enact legislation earlier this year.

The USDD is also offering promotional high returns, even topping the 20% yield offered on Terra with the promised 30% return. Exchanges like Huobi have already launched USDD-related high-yield products. Sun said the outsourced yields would be reviewed on a monthly basis by the Tron DAO Reserve and would “actively adjust” the numbers based on market conditions. Still, not everyone is sure about USDD and even the whole sector will avoid the same consequences as UST.

“I think the sector is done,” said Ryan Watkins, co-founder of crypto hedge fund Pangea Fund Management. “I was hoping Terra would be able to pivot in time.”

© 2022 Bloomberg

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