Terra is history, USDT shrinks, and USDC thrives
On Monday last week, we wrote that the largest decentralized stablecoin TerraUSD (UST) slightly unpegged from the dollar over the weekend. Fast forward one week, TerraUSD and its native token Terra (LUNA) are now put to sleep. On Monday afternoon, TerraUSD started to unpeg significantly from the dollar, leading to a true death spiral of Terra, further unpegging TerraUSD. TerraUSD presently trades at $0.078, far from its intended price of $1. Prior to these events, TerraUSD had a supply of around 18bn, whereas it is now around 11bn. To redeem some of this supply, its native token Terra went through hyperinflation. From trading at around $82, Terra now trades at $0.00019. As this event unfolded, we wrote an article explaining the death spiral of Terra. Let us face it, Terra is for sure put to sleep, but the consequences are greater than just the Terra ecosystem.
First and foremost, the collapse of Terra attracts the attention of regulators around the globe. The crypto market has over the past 2 years grown substantially, arguably to a size, where it today might pose a systematic risk to other asset classes. Regulators cannot simply sit on their hands to let this risk unfold in front of their eyes, so at some point, they must react to restrain the potential risk of crypto. So, if regulators did not have enough rationale to heavily regulate the industry a week ago, they surely have now. If the governments see fit, they have the required latitude to bury the industry in a coffin through regulation. However, it is important to point out that regulation can likewise be beneficial for stablecoins. As reported by The Telegraph last week, the UK plans to legalize payments with stablecoins to support innovation, ultimately benefitting the whole crypto market.
Knowing the common pace of regulators, the risk of harsh regulation is by default not a short-term risk. What is short-term, though, is the risk of other stablecoins, namely the largest stablecoin Tether (USDT). For years, Tether has not been truly transparent about its reserve backing its $75bn stablecoin. Immediately upon the Terra collapse, the crypto market once again started worrying about Tether’s reserve, which led to a sell-off of Tether, depegging it from $1 to as low as $0.95. It appears market makers and proprietary traders fairly quickly restored Tether at around $1 by buying Tether at a discount and redeeming them directly at Tether for one dollar apiece. Speaking of redeeming, Tether has since the end of last week redeemed Tether worth around $8bn, allegedly with no issues for the time being. As the saying goes, every cloud has a silver lining, since some of the USDT supply has flowed into the second largest stablecoin USDC, whose supply has increased by $2.5bn in the past 7 days. The issuer of USDC, Circle, is known for having a high degree of transparency with respect to its reserve.
Heading into the new week, our focus is firmly pointed towards Tether. Even though Tether has allegedly fulfilled every request of redemption so far, if a single story breaks that Tether cannot fulfill a redemption, fear not seen since March 2020 will spread in the crypto market. Well, if last week felt like months’ worth of fear in a single market, if Tether is insolvent, we are talking years’ worth of fear, simply due to mutual distress that Tether has then artificially pumped the prices of crypto assets for years by issuing not fully backed Tether.
Norway does not prohibit proof-of-work, as Bitcoin’s mining difficulty hits an all-time high
Following in the footsteps of the European Union, the Norwegian Parliament voted no to prohibit proof-of-work on Tuesday. The consensus mechanism used by Bitcoin and Ethereum has for years been criticized for its enormous energy consumption, but for the majority of the Norwegian Parliament, the energy consumption was not enough for them to vote in favor of a ban. Since Norway accounts for roughly 1% of Bitcoin’s mining capacity, a potential ban would not have been a severe hit to Bitcoin, other than the signaling effect of such a ban. Interestingly, the network difficulty of Bitcoin hit an all-time high last week, meaning the network demands more computational power than ever from miners for them to confirm transactions. This is great for Bitcoin’s resistance to attacks, but as a result, the network also consumes more energy.
The first public Ethereum merge test is scheduled for June 8th
Speaking of proof-of-work, the second-largest cryptocurrency Ethereum is one step closer to abandoning proof-of-work to adopt proof-of-stake. On Friday, Ethereum core developers announced that the first public test of the merge is scheduled for June 8th. The merge is the name of the transition from proof-of-work to proof-of-stake. For the past months, there have been a total of five tests, but this is the first public test of an existing network called Ropsten, marking that we are one step closer to the merge. Following Ropsten, it is planned to merge two other test networks prior to the merge. If everything turns out well with Ropsten and the following two test networks, it is realistic to assume that the merge takes place in August. The merge will reduce Ethereum’s energy consumption by over 99.95%, reduce its inflation from 5.4mn to 0.5mn Ether yearly, and distribute staking rewards of up to 10% annually to stakers of Ethereum.