Stablecoins have been the crypto killer so far – not Terra

Circle bought $7 billion USDC last week as markets reacted to Terra’s demise – emphasizing the importance of securing stablecoins during intense volatility. The Boston-based coin stable issuer bought $61 billion last year, Circle Vice President of Product Management Joao Regina said during a panel discussion at Blockworks’ unlicensed Blockworks event in Palm Beach on Wednesday.

That means Circle processed more than 11% of its total exchanges for a full year in just one week — a week that took up $280 billion of the total cryptocurrency market cap. Other panelists included Nick Carter of Castle Island Ventures, CBDC and Visa protocol heads Catherine Gu, MakerDAO chief developer Sam McPherson, and Frax founder Sam Kazemyan. Terraform Labs founder Do Kuon was originally slated to appear on the panel.

“Our model is very boring, very, very simple: full security,” Regina said. “Customers bring a dollar, we give them 1 USDC, we keep the dollar. They use USDC, we give them a dollar back.” Circle’s approach is in stark contrast to Labs’ algorithmically failing TerraUSD (UST) coin. Circle supports USDC with a mix of cash and US Treasuries, while UST has sought to maintain its exposure to the dollar through arbitrage and a complex mining and underwriting process with its secondary token, LUNA.

Terra is a cryptocurrency ticking time bomb

The bombastic founder of Terraform Labs, Kuon, tries to increase UST’s viability by raising more than $3 billion worth of bitcoins. It’s not the technical security to back the UST, but the cryptocurrency that must be issued to “protect” the stablecoin locks when they start to falter.However, UST fell from $1 to $0.04 earlier this month. LUNA, on the other hand, fell to a fraction of a penny from just over $86. More than $46 billion evaporated from the combined market cap of UST and LUNA in just four days.

“Luna/Terra is definitely the biggest ticking time bomb [in the crypto space], certainly the most fragile project,” Carter said. Carter described Terra’s unsecured design as a “reckless financial engineering” and called its demise predictable to those with “lack of prospects”. Terra’s algorithms are shrouded in complexity, even on purpose, making it difficult for viewers to explore and understand how they work.

“People can’t comment because [Kuon] is so loud on Twitter. It feels like you don’t want to offend your industry peers who have invested in Terra – there’s a tremendous incentive not to investigate,” added Carter. MakerDAO lead developer McPherson agrees that Terra’s design was cruel “from the start”. The UST boom highlights the need to deploy stablecoins, said McPherson. That’s why MakerDAO chose stablecoins for the security of over-secure DAI (currently 164%), “so consumers can rest assured they can always trade DAI for a dollar.”

Stablecoins are cryptocurrency killers

CNBC panelist Kate Rooney asked Visa’s Gua how the financial giant felt about Terra’s failure. Gu said Visa wants “interesting uses” and its focus in the stablecoin space is on fiat-backed digital currencies. Visa is also researching projects that use on-chain collateral — a sophisticated term for crypto-backed stablecoins, such as MakerDAO’s B.DAI.

“We need to think about how these different projects are built — an important precaution and standard for consumers, retail investors and institutions,” Gu said. It’s important to understand how stablecoin reserves are tested and who is modeling and testing their systemic risk, he said, saying “even the safest assets can be at risk.”

Founder Frax Kazemyan agrees, although the stablecoin relies on a shard algorithm to maintain its fixation — albeit designed slightly differently from UST Terra. Currently, 89% Frax is secured, with the remaining 11% supported by algorithms that generate value by interacting with various decentralized finance protocols (DeFi). Kazemyan said: “That is why Frax’s guarantee lies along the chain. The collateral is algorithmically adjusted and you can see the level of debt and liquidity in the credit market. You can’t just do a lot of these things and expect them to work well: draw a target on your back.