Stablecoins and the crypto “death spiral”: how they work, the risks and why the Argentine “caves” choose them

Terra, the crypto ecosystem that collapsed (REUTERS / Given Ruvic / Illustration)
Terra, the crypto ecosystem that collapsed (REUTERS / Given Ruvic / Illustration)

“Complete collapse.” “Spiral of death”. “Mega Ponzi”. These are some of the concepts that have flooded the networks in recent hours, after a very sharp drop in the price of cryptocurrencies caused by serious problems with a stablecoinor stable currency, one of the tools of the crypto world that promises parity with instruments of the traditional economy, the dollar in this case.

That is what makes them one of the favorites of the Argentine “caves”. It is not strange to see LED signs in some exchange houses that, in addition to USD and Euro, say USDT. In the others, the illegal ones, they don’t have neon signs or billboards, but they do have a lot of movement.

In short, one of them, TerraUSD, which uses a controversial operating scheme – questioned even within the crypto universe itself, something that did not prevent it from becoming the largest of its kind – collapsed and dragged down the entire system. Bitcoin sank below $28,000 after its peak of $69,000 per unit in November last year, with the other crypto assets losing much of their value as well: Ethereum down 20%; the youngest, or altcoinsa lot more.

Although this Friday seems to have brought some calm – with bitcoin very hit, but recovering some ground with a price of around USD 30,600 and a rise of 9 percent in the first hours of the day – CoinMarketCap is already talking about a loss. total of USD 270,000 million.

“We were surprised to see a platform as big as Terra go down. It is something that is unprecedented,” he told Bloomberg today. mihir gandhiof PwC, who defined the context of stablecoins as “worrying”.

According to Bloomberg, more traditional stablecoins such as Tether, USDC, and Binance USD, which hold dollar equivalents and other reserves to support their pegs, are trading more stable today, “suggesting that the collapse of UST has not yet eroded confidence. However, regulators have taken note of the episode and promise to step up surveillance.” Yesterday, Janet Yellen, the head of the US Treasury, spoke of the collapse of TerraUSD: she said that it shows the risks associated with the asset class that “pretend to be pegged to the dollar”, called for new regulations and added that the Treasury was working on a report on its dangers . Magazine The Economist was more forceful and stated that “the crypto infrastructure is broken.”

There are three models of stablecoins.

– Those that have collateral in fiduciary currency, which are backed by dollars in a bank account, such as USDC, for many the safest because it is regulated by US legislation and has the support of Goldman Sachs. In this segment there is also USDT (Tether), which has the most volume and is the most used, but it is also controversial due to its weak auditing system. Bitfinex, the company behind Tether and USDT, had a complaint for its services tied to the dollar and reached an agreement with the New York Attorney General’s Office to pay a fine of USD 18.5 million.

US Treasury Secretary Janet Yellen (Graeme Jennings/Pool via REUTERS)
US Treasury Secretary Janet Yellen (Graeme Jennings/Pool via REUTERS)

– Then there are mixed models such as the DAI that is collateralized with debts in dollars in overcollateralized markets against assets that are liquidated: for each DAI there is robust support, say its creators, in another crypto. And they are within the world of decentralized finance.

– And, finally, there is the new algorithmic model that embodied Terra with UST. From Ripio they explained it this way: “it is the model that we could call the riskiest of all, since they are stablecoins that are backed by the same UST protocol token, the Terra Cryptodollar, which is a stablecoin algorithmic. This type of stablecoins are very much at the mercy of arbitrage, which consists of buying an asset at a exchange or platform at one price to immediately sell it at another at a better price. But with the recent crash of the crypto market and LUNA, Terra’s native token, many people decided to exit UST and move on to other assets, including stablecoins alternatives. That selling pressure pushed the price of UST down. That has happened and happens many times with this and others stablecoinswhich are suddenly traded in a exchange at $0.99 or $1,001, for example, depending on whether there is increased selling or buying. But UST has a stabilization mechanism that LUNA mediates, and that has certain daily limits. The sustained fall of that token plus that distortion in the price of UST, no longer set at 1 dollar, generated more sales and exits than the protocol could handle, so the stabilization mechanism was insufficient and the price continued to plummet. .

Today, LUNA and UST are almost liquidated. Steven Kelly, a researcher with the Yale Financial Stability Program, told Quartz that this crisis had a profound impact on confidence in Terra’s promise of value. “It’s 100% Ponzi,” Kelly told that outlet.

In Argentina, 12 out of 100 adults bought cryptocurrencies to save or invest, according to a study by Americas Market Intelligence (AMI) based on 400 surveys of smartphone users. That percentage is double the average for Latin America while in the United States 16% of the population had bought cryptocurrencies at the end of 2021. More than half of those consulted in the survey cited “protecting their savings” as a key benefit of these types of investments.

LUNA, Terra's crypto (Illustration: Jovani Pérez)
LUNA, Terra’s crypto (Illustration: Jovani Pérez)

Although part of these investments are made through new platforms, another is made in the “black” in the “caves” of buying and selling the dollar that, for some time now, have turned fully to crypto. According to Chainalysis, in 2021, the adoption of cryptocurrencies increases 880% globally. Venezuela and Argentina, with their financial problems, led this growth in Latin America.

In short, the operation works in the same way as the dollar sale blue: the client goes with cash and deposit crypto into your account exchange or wallet, or vice versa. “It’s the same, but better. Crypto mobility gives speed and global reach. USDT is generally used. The one who bought UST in caves did it to do some financial business”described Ignatius Carballoeconomist and teacher, Crypto & Alternative Finance lead of AMI (USA) and director of the Fintech Ecosystem of the UCA.

The “caves”, as usual, join points, in addition to doing their business. “It is the same as the dollar, but it is not passed through any bank and it is in black. Also, in the crypto case, it is immediate and you can skip the controls. It is charged according to the market. Before these problems, there were no dollars and he wanted to go from bitcoin to cash, paid a 4% commission. To those who wanted to compare crypto, we paid them 1 percent. Now, in decline, many want to enter and they charge 4% and those who want to leave, 1% or parity”, they detailed from one of these “establishments”.

“Once they have the stablecoin they go out into the world: they pay outside, they spin, whatever they want. It is a solution for many and it is not only ‘timba’, there are a lot of savings and also important operating issues. Some SMEs that cannot access the MEP dollar because they received some benefit from the Government are dollarized with crypto and turn stablecoin. There are controls, the options appear”, they added.

USDT also plays a key role in one of the hottest trends in the world of work in times of pandemic and post-pandemic. The export of services in particular. The generalization of remote work allowed, especially in areas related to systems and technology, a revolution in remote work. Professionals or self-taught have the possibility of working informally abroad in the provision of services and, faced with the alternative of charging in dollars through the traditional financial system and having to settle them at the official exchange rate, many of these workers choose to charge via crypto. : Thus, with a stablecoin that trades at par with the dollar, they can maintain the value of their income at the parallel exchange rate and, faced with every need for liquidity, they go to caves and informal financial institutions to get hold of pesos.


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