Nearly a year ago we posed the question, where did your terra stablecoin assets go? At that time Sam Bankman-Fried of FTX was on house arrest while Do Kwon of the Terraform ecosystem was on the lam, believed to be in Serbia. He was apparently living off of 10,000 BTC that he had removed from Terra, put in a cold wallet, and was accessing with the help of a friendly Swiss bank. Today Kwon is in custody in Montenegro and awaiting extradition to the USA. Meanwhile the travails of his company continue as Terraform files for bankruptcy.
What Happened to Terraform?
Terraform Labs (TFL)is the company that created and managed the TerraUSD algorithmic stablecoin TerraUSD. It was the collapse of TerraUSD that upset crypto markets in 2022. Subsequently it became clear how much power and wealth in the crypto world was held by just a few entities. The rationale for the TerraUSD stablecoin was that it would use a set of algorithms to maintain its stability. That worked so long as the crypto world was relatively stable in and of itself. However, when the supporting LUNA token became hyperinflated as a result of algorithmic trading, there was no support for TerraUSD which lost roughly $40 billion in value. Today, as the company files for bankruptcy in Delaware, it claims to have between $100 million and $500 million in assets and a roughly equivalent amount in debts. The collapse of the Terraform system has become a textbook lesson for the perils of stablecoins backed by algorithms and not cold hard cash.
Parallels Between FTX and Terraform
The collapse of Terra followed by others and including FTX came down to two basic issues. First, promoters of crypto had come to believe their own hype. Crypto was the wave of the future, a reliable store of long term value, a hedge against inflation, and it was going to go up forever. The second issue was that greed overtook the few people at the heart of the crypto world. A system that was supposed to be decentralized had become centralized in just a few hands. Like with 19th century American robber barons, wheeling and dealing, skirting any rules, and the thirst for more, more, and more created a vulnerability unseen by investors and the general public. In both cases of FTX and Terraform the boss was actively finding ways to hid money at the same time that they were reassuring the public that their business was solvent.
Crypto Needs Stablecoins
When Bitcoin was invented the idea was to have a means of buying, selling, and transferring money via the internet. As the value of Bitcoin and subsequent tokens went up they became speculative assets whose prices were very volatile. While this allowed many to create fortunes it did not serve the original purpose of Bitcoin and crypto in general. Our opinion is the future of the crypto world lies in decentralized finance which is the logical end result of having the ability to do business over the internet. The answer to the viability issue is to back the stablecoin the dollar, euro, yen or even gold. This allows people to do business across the world without fear of huge exchange rate fluctuations letting every business transaction descend into a night at the Las Vegas roulette tables.
