Technology

According to The Economist, the crypto infrastructure is broken

The fall of cryptocurrencies on a chart
The fall of cryptocurrencies on a chart

The financial markets have not had a good year, and it has been even worse for crypto assets: more than half of the cryptocurrency market capitalization has been lost since the month of November. On May 12, bitcoin was trading around $29,000, just 40% off its all-time high. registered in November; Ethereum has plunged by a similar amount.

This is assured by a hard article published in The Economistin which it was describede the magnitude of the fall in cryptocurrencies recorded in recent days, and its consequences.

The share price of the leading exchange in the crypto industry, Coinbase, is half what it was a week ago, falling 26% in a single day after it reported earnings and revealed that user deposits on its platform were not necessarily protected in case the company went bankruptcontinues the article of the weekly publication.

“The liquidation occurred at the same time as the Tech stocks, high-yield bonds and other risky assets fade due to a new rise in interest rates by the Federal Reserve”.

Photographic illustration depicting the bitcoin cryptocurrency (REUTERS/Dado Ruvic)
Photographic illustration depicting the bitcoin cryptocurrency (REUTERS/Dado Ruvic)

The article further states that while much of the technology (and jargon) of the crypto world remains puzzling to most people in traditional finance, what happened in the last few days bears the stamp of the old financial collapses of yesteryear.

As an example, we analyze what happened with the stablecoinsa type of cryptocurrency pegged to another conventional currency, such as the dollar. These are part of the crypto system: they act as a bridge between conventional banks, where people use dollars, and the blockchain world”, where people use cryptocurrencies. The links between stablecoins and traditional finance raised concerns among regulators about the impact they could have on the financial system.

All the stablecoins added together are worth around $170 billion, which includes the big ones like tether and USD currencyand the smaller and more stable ones like land. To a greater or lesser extent, all of them have been under pressure on May 12, which makes economist claim that the events resemble the crises of confidence that have preceded every bank run in history.

Terra stablecoin crash
Terra stablecoin crash

Each stablecoin has a mechanism to maintain its reference. The simplest (and safest) method is to keep one dollar in a bank account, or in safe liquid assets like Treasury bills, for each stablecoin token.

Some stablecoins like land They are also called “algorithmic stablecoins” because They use an automated process to support linking or referral.

But their main difference is the way they are backed. land is backed by Moona cryptocurrency issued by the same company that issues land. The theory behind this was that possessors of land they could always redeem it for a dollar’s worth at Moon. a week ago when Moon was quoted at USD 85 per unit, a holder of land could redeem it for 0.0118 moons. The automated system allowed to create more Moon when a possessor of land I wanted to exchange. If for some reason land was trading for less than $1, the umpires would go out and buy a landthey would exchange it for Moon and they would sell it for a profit.

Tether logo, stablecoin
Tether logo, stablecoin

According to The Economistthis system worked quite well while Moon It had some market value. But on May 9 the price of the moon began to drop. On May 10, it was worth around $30, and the next day it fell to less than $1.50. Currently trading at about 3 cents. As the fell Moonpeople also began to sell landand the referees did not dive to save the reference, which ended up breaking.

It is not clear what will happen to land now. But what is known is that the perception that these stablecoins they might not be as stable damaged trust in them and will have even more effects.

However, the specialized magazine admits that a positive factor was that The flight from stablecoins has not been indiscriminate, repeating what happened in the past with bank runs: depositors fleeing from bad banks to good ones.

Still, the failure of the land Y Moon It did not come at a propitious moment. That the defeat of cryptocurrencies has caused problems for stablecoinsa central part of the crypto-financial infrastructure, it can bode badly for the system’s ability to recover in general. And tensions are emerging in the traditional financial system.

“The era of free money in America has come to an end and cracks are appearing in all kinds of financial markets”ends the article.

Keep reading:

The cryptocurrency debacle caused losses of more than 200,000 million dollars in a single day
Who Are The Crypto Millionaires Losing Their Fortunes: The Market Crash Made $200 Billion Disappear

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