The author of this piece, Staci Warden knows some stuff about both fintech and capital markets.
I don't know if she will be able to pull off what she is trying to do. I don't even know if there is a there, there.
From the Milken Institute Review, January 24:
Do Kwon, co-founder of Terraform Labs, thought he might improve upon the financial model of “stablecoin” cryptocurrencies pegged to the dollar. Instead of holding dollar-denominated assets in reserve to defend the pegged value, he reasoned, why not create an algorithmic stablecoin — he’d call it Terra (which trades as UST) – worth one dollar of yet another cryptocurrency he would create, called LUNA.
This way, when the market value of UST became greater than $1, users could trade $1 worth of LUNA for UST for a profit, which would then drive down the value of UST. The reverse would happen if UST traded below $1. They’d balance each other on their own so he wouldn’t have to hold all that expensive U.S. dollar collateral to back the value of UST. Add a lending protocol on the Terra blockchain paying 20 percent interest rates in order to Anchor (the name of the protocol, really) demand for UST, and he was done. What could possibly go wrong?
I know, I know: I lost you somewhere between UST and Anchor — as, apparently, did a lot of investors in Kwon’s magic money machine. This much is clear, though: it all came crashing down in spectacular fashion last May, when the symbiotic relationship between UST and LUNA unraveled in a kind of process that Wall Street has traditionally, though not entirely helpfully, labeled a “death spiral.” The spiral started with a run on UST, which triggered an ever-increasing issuance of LUNA to maintain the peg, which then caused LUNA to decrease in value. Rinse and repeat.
The whole thing plummeted to nothing, wiping out $60 billion in value and earning the meltdown the title (against some tough competition earlier this century) of the largest singleasset failure in the history of finance. It goes without saying that countless small investors were wiped out in the process. Kwon is now wanted by Interpol in 195 countries.
One of the not-so-small investors to take a swan dive was the hugely influential hedge fund and proprietary trading firm, Three Arrows Capital. Three Arrows had made hundreds of millions of dollars in highly leveraged positions in LUNA (among other cryptocurrencies) with customer money that was lent, in a shockingly high percentage of the time, without collateral of any kind. Three Arrows went from a claimed $18 billion in net asset value to bankruptcy in a matter of weeks this past July — and something like $3 billion is still owed to creditors today.
The fallout reverberated across crypto markets, and institutions that had large, unsecured positions with Three Arrows began to fall like dominos. For example, the lending platform Celsius Network, went from $18 billion in assets under management and another $8 billion in client loans on its balance sheet to $167 million cash-on-hand by the time of its liquidation. An exchange called Voyager Digital lost $650 million “deposited” at Three Arrows at the time of its bankruptcy, and Voyager’s more than three million customers are now struggling to get their money back.
This implosion, in the teeth of the geopolitical and macroeconomic policy headwinds that have affected all financial assets, ushered in $2 trillion in cryptocurrency losses in nine months, in what has become the entire ecosystem’s terrible, horrible, no good, very bad year.
“If we lose the battle to preserve public decentralized blockchains (aka ‘crypto’), with mathematical certainty in 10 or 20 or 30 years a long, dark night will fall over humanity,” tweeted @punk6529, a pseudonymous but highly influential NFT art collector, in October.The remarks were a reaction to both the potential power of digital currencies issued by central banks and the recent U.S. Treasury sanctions on Tornado Cash, a “currency mixer” platform that facilitates anonymous payments. For libertarians like @punk6529, the value of a decentralized financial system built on a peer-to-peer framework rather than financial intermediaries is that the former enables a range of financial activities that are both permissionless and censorship-resistant. Anyone can access a decentralized cryptocurrency protocol and nobody, at least in theory, controls it.
Note, though, that crypto is more than a libertarian cause. Decentralized finance holds similar promise for progressives. Distrustful of the value of banks for the households and entrepreneurs of Main Street, and tired of fattening the market caps of large, centralized corporations like Facebook, many on the democratic left see the power of the blockchain as a way to capture more value for the creators of that value — as well as a model for bringing large swathes of the economically disenfranchised into the global financial system.....
....MUCH MORE
