One would be forgiven for not following the Luna/Terra death spiral. If it wasn't for Matt Levine, I would have given up on understanding crypto a long time ago. Even now, my eyes have a tendency to glaze over. But this one is interesting because it gets right at the Icarian nature of some crypto projects.
Anyway, here is Matt:
Anyway, here is Matt:
TerraUSD, or UST, the US dollar stablecoin of Terraform Labs, has been having a bit of a death spiral this week. (I will use “Terra” and “UST” interchangeably to refer to this stablecoin, which is not quite correct but is easy.) It traded as low as $0.30 a couple of times overnight last night; as of noon New York time today it was at about $0.53, which is not really all that close to $1. Meanwhile Luna, the other currency — the one that you can exchange for Terra — was at about $2.20, down about 93% in 24 hours and about 97% from last week. If you exchanged 1,000 Terra for Luna last week, you got about 11 Luna. If you did it this morning, you got about 450 Luna.
The stablecoin (newspeak in this context) isn't backed by anything. There is an algorithm that is supposed to make it easy to arbitrage Terra with Luna to keep the price of Terra pegged around $1. No one really understands the algorithm except maybe Do Kwon and a few people who are the creators and sworn defenders of this peg. If you need evidence of how seriously they take themselves, they are called the Luna Foundation Guard.
I wish Do and the LFG all the best. They are desperately trying to restore confidence in the peg and defend Terra by taking out Bitcoin loans and buying Terra with it to push up the price. If they are successful, their lenders will make a lot of money. It's not looking great though.
One reason it isn't looking great is because a lot of people who invested in Terra wanted it to be interchangeable with dollars. That's a stablecoin. Now that it's crumbling to pieces, it is proving hard to inspire them to stick around be true believers.
So I think Matt really nails it here:
I cannot stress enough that this is not at all how US dollar bank accounts work. If your bank sent you a letter saying “we misplaced half your money, oopsie, now your dollars are worth fifty cents, but we have hundreds of passionate teams building category defining applications, we’re here to stay and we’re gonna keep making noise,” not only would that be very bad, it wouldn’t make sense. “I don’t care about your passionate teams and applications and noise,” you would reasonably say; “those things might be of interest to your shareholders, but I am a depositor, and I just want my money back. I just want a dollar in the bank to be worth a dollar.” But in algorithmic stablecoins those things are mixed together: Your dollar in Terra is, or is not, worth a dollar because people do, or don’t, have confidence in Kwon, in Terraform Labs, in the teams and the applications and the ecosystem, in Luna as essentially an equity bet on the growth of that system [emphasis mine].
One thing the SEC is trying to grapple with from a regulatory standpoint is WHAT exactly crypto is. When we think of currency, we usually have three rules of thumb, and they are all interrelated.
- Medium of exchange
- Unit of Account
- Store of Value
What is Terra in this context?
- You can exchange dollars and Luna for Terra (although the Luna market is highly illiquid at the moment). But very little can actually be bought with Terra - especially now
- Not very much is denominated in Terra
- Terra is melting down, so isn't a reliable store of value
This is why Levine is right to portray Terra and Luna as securities. It really is essentially a share of equity with no real voting rights. It's an investment and a statement of interest in a project that the coin is meant to underpin. Like a stock, it is worth nothing if the enterprise goes bust. Unlike a stock, the thing itself could explode and bring the enterprise down with it.
When you portray algorithmic stablecoins in this way, it really changes the perceived risk. Good luck to Do Kwan as he does battle to save his.