Are We Seeing the Collapse of Stablecoins?
In journalism, there’s this phenomenon referred to as Betteridge's Law that states “Any headline that ends in a question mark can be answered by the word no.” The idea came from the fact that modern media needs to come up with the most controversial titles possible because people won’t bother to click them otherwise. The easiest way to do that is to frame the subject matter in its most scandalous form, even though the truth is actually the opposite. So, dear readers: Is Tether's USDT in danger of losing its peg? Could stablecoins topple the crypto industry? Could Tether be the catalyst of a crypto apocalypse? Is TerraUSD's collapse crypto's Lehman Brothers moment? The answer to all of these headlines is “no.” But in the days following the collapse of $LUNA, both the media and the crypto community have been hellbent on making it appear like $USDT and the rest of the market is about to coming crashing down around us. So, are we seeing the collapse of stablecoins? Nope, not by a long shot.
Let’s look at the actual numbers. This last week, a little over $9B worth of Tether was withdrawn from the market. Depending on which coverage you believe, that $9B amount is 10x of what caused the collapse of TerraUSD, so it’s easy to see how the uninformed might think that an even bigger disaster was incoming. Tether’s marketcap is now hovering at $73B, down from a high of $82B. But here’s the part that is lost on a lot of people: Tether’s marketcap is 100% made up of real dollars deposited. This is markedly different from algorithmic stablecoins like $UST … or indeed every other cryptocurrency, including Bitcoin. I said this in the previous newsletter too, but it bears repeating here: in most cases, marketcap is a mirage. Just because Bitcoin’s marketcap right now is $557B, doesn’t mean that $557B in actual dollars have ever been paid in exchange for those bitcoins. To make a rather extreme example: let’s say I created a new cryptocurrency called $BEAN with 1M tokens today. If I managed to convince a single buyer to pay me a dollar for 1 $BEAN, the marketcap of my new crypto is now technically $1M, even if only $1.00 in real cash was ever paid.
In the case of most cryptos, the amount of dollars originally paid is far less than the marketcap (… or in the case of catastrophes like $LUNA, far more.) The exceptions are these OG stablecoins like USDT and USDC. Their respective marketcaps reflect the actual number of dollars deposited, so you can’t affect their exchange rate just by withdrawing lots of tokens. That said, it is possible for their exchange rates to drift temporarily inside specific exchanges, when there are more sellers than buyers. Eventually, this resolves on its own though and is never a permanent situation.
Speaking of resolutions, $LUNA and its Terra Foundation has successfully passed a community proposal with a recovery plan for their embattled ecosystem. The details are a little too involved for this newsletter, but suffice to say that they intend to create a new $LUNA token without the $UST stablecoin. I’m personally not a fan of the proposal, but since this might be one of the most watched DAO votes ever carried out, I wanted to quickly explain the voting process.
The screenshot (taken on Saturday morning , May 21st) shows a total vote count of 229M, from a maximum 365M. As you can probably guess from just those numbers, DAO votes don’t work like normal democratic votes. Obviously, there aren’t 229M people holding $LUNA (thankfully) … in fact, it’s unlikely that there would even be 229M people holding crypto of any kind who know how to participate in this kind of voting. Those numbers actually correspond to $LUNA tokens, and the amount of $LUNA that is held by a particular voting entity (either an individual, a DAO, or a corporation). So if a group owns 10M $LUNA, and they vote “yes,” the proposal will receive 10M “yes” votes. Small fish like you and me will therefore have very little impact on votes like this, unless we consolidate and organize ourselves.
Since we’re already over the “Pass Threshold” of 40%, the proposal looks like it will successfully pass, even with four days remaining. 20% of the votes chose to “abstain”, which was interesting to me because it implies that there’s still some indecision about what the correct course of action is. Even more interesting is that there’s 14% voting “No with Veto.” This is the DAO equivalent of “violently disagreeing” with a proposal, because it not only votes against a given idea, but it also moves to penalize the proposer by burning their deposit. (Putting forward proposals is not free and involves a deposit of some tokens, which discourages people from spamming the DAO with frivolous ideas.) Typically a “No with Veto” vote only happens when the proposal is deemed as being harmful to the community. In order to cancel this proposal, 33% of the voters need to signal “No with Veto.”
Tomorrow is Bitcoin Pizza Day, and I’ll be appearing at one meetup and one livestream to celebrate! Come and hang out with maxis at the Draper Startup House in Poblacion at 2pm, or watch our second episode of CryptoCurious with Celeste Rodriguez at 830pm at the YGG Pilipinas FB page.
Have a great weekend, cryptofam!