Technology

What if there’s a crypto bull run: Who can those losing money from the market crash turn to?

Exchanges, cryptocurrency markets, are not necessarily responsible for the holdings of their users
Exchanges, cryptocurrency markets, are not necessarily responsible for the holdings of their users

The crypto market is experiencing one of its worst moments. Hand in hand with global financial volatility, these assets that are still new compared to traditional investments mostly react with declines much more forceful than those suffered by the stock markets after the blow to the global economy caused by the war in Ukraine and the attempt by the United States Federal Reserve to quell inflation.

The bearish trend that gripped the market this week had an anabolic effect that fueled price declines and generalized a feeling of panic among investors. One of the most promising stablecoin projects, TerraUSD (UST), a currency that was intended to mimic the value of the US dollar completely lost parity with its reference as a result of the fall in cryptocurrency pricesespecially Luna’s, the token that UST used to keep its peg with the dollar.

UST was the third largest stablecoin in the crypto market. Tether (USDT) and USD Coin (USDC) outperform it in market cap. But unlike those two, UST was an attempt to create the “algorithmic” stablecoin. The difference, broadly speaking, is that while USDT and USDC maintain the peg with the dollar through the accumulation of reserves in dollars and other traditional assets, the failed UST tried to maintain its value through an arbitrage mechanism with Moon and other cryptocurrencies. But now he is the target of a bullfight.

Luna Foundation Guard fights to bring UST back to 1:1 parity with the dollar, but still can't
Luna Foundation Guard fights to bring UST back to 1:1 parity with the dollar, but still can’t

The Anchor protocol, which promised a return of almost 20% per year on UST, attracted millions of savers, aggravating the impact of the failure of the stablecoin by adding volume and victims of its collapse. The autopsy on UST is not over yet: the main hypothesis is that the volatility of the crypto used to guarantee its price triggered the arbitrage mechanism. But investors also risk hypotheses of attacks and manipulations.

whatever the reason, the losses of small and large investors in UST, Luna and Anchor accompanied a general decline in the value of cryptocurrencies as a whole. According to figures from CoinmarketCap, the market capitalization of all cryptocurrencies wiped out $200 billion in value in the last 24 hours alone.

The nature of the crypto world, its goal of being an ecosystem that is deregulated, decentralized and free from any possibility of repression, leaves investors completely on their own. Like few others, the cryptocurrency market is a market of individuals without recourse to third parties.

The nature of the crypto world, its goal of being an ecosystem that is deregulated, decentralized and free from any possibility of repression, leaves investors completely on their own.

Faced with a bullfight like the one suffered by UST and Luna, then, the individual investor has little on his side. He took a risk and assumes the results.

The closest thing investors in these cryptos have to a regulator is the Luna Foundation Guard, the organization behind the UST and Luna project. His alma mater, Terra co-founder developer Do Kwon, is leading the foundation’s efforts to try to overcome the UST collapse. For that matter, it would be the closest thing to a central bank: the organization went out to combat price falls through the use of reserves.

In the midst of the debacle, Kown and the Luna Foundation laid out a plan. To return parity to UST, Kwon indicated that he was supporting a community proposal that will increase the amount of Luna minted per day by four times. This would allow the ecosystem to cope with the high demand for Luna from investors looking to offload UST due to its recent collapse.

The cryptocurrency market erased a value equivalent to USD 200,000 million in 24 hours REUTERS/Dado Ruvic/Illustration/File Photo/File Photo
The cryptocurrency market erased a value equivalent to USD 200,000 million in 24 hours REUTERS/Dado Ruvic/Illustration/File Photo/File Photo

“First of all, the only way forward will be to absorb the supply of stablecoins that [buscan liquidarse] before UST can start to rebind to the peg. There is no way around it,” explained the founder.

It should be noted that UST relies on LUNA to maintain its 1:1 peg to the US dollar through a set of token issuance and burning mechanisms. Users can always trade 1 UST for the equivalent of $1 Luna. Every time they do this, they also destroy that UST and take it out of circulation. However, only a limited amount of UST can be sold per day. Therefore, at the same time, it seeks to increase Luna’s minting capacity from USD 293 million to USD 1,200 million.

“Yes billions of UST are burned and Luna will be significantly diluted. However, there is no limit on the supply of Luna, this market mechanism will actually work to bring stable UST and stable Luna price (although probably at a lower price for Luna)”, explained the proposal that until now practically only found votes. in favor among crypto holders.

The closest thing investors in UST and Luna have to a regulator is the Luna Foundation Guard, the organization behind the project.

Until now, the efforts of Kwon and Luna Foundation Guard did not have the expected result.

And the feeling of helplessness that many cryptocurrency investors fell into was heightened by yet another revelation. Coinbase, the most important cryptocurrency exchange -market- in the United States informed the Stock Exchange that investors who use their systems they don’t even have the right to claim them in case something goes wrong.

“Because crypto assets in escrow may be considered the property of a bankruptcy estate, in the event of bankruptcy, the crypto assets we hold in escrow on behalf of our clients could be subject to bankruptcy proceedings and such clients could be treated as our general creditors. unsecured,” Coinbase wrote in the filing.

Said simpler. In the event of bankruptcy, the holdings of Coinbase users do not belong to those users. They are part of the assets that the company can liquidate to pay off debts.

And at this point is where one of the most important elements of the crypto world becomes relevant. The idea of ​​decentralized assets and currencies – without banks, governments or the traditional financial system – implies that in order to own those assets, each investor needs to put them in their own pocket. Or, in crypto terms, in his own wallet. Whether it is a digital wallet like Metamask or a “cold” wallet like Ledger – an object similar to a flash memory – if the investor does not have his crypto in his hands, he does not own it. And if the third party with which he operates, an exchange for example, disappears, there is no one to claim.

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