If USDT were to break peg, there’s a good chance someone with more detailed information on Tether’s accounts (and very deep pockets) would be willing to pay, say, 90 cents for the whole lot, knowing they’d get back 95 cents or thereabouts in a few weeks.
“If something cannot go on forever, it will stop.”
— Stein’s Law, Herbert Stein
Q: Is Tether next?
I don’t think so. My guess is they are good for the money, but I doubt they can come up with it immediately. Which could be a problem.
The good thing is that, unlike Luna/UST, the outcome is not binary. Tether is a money market fund that holds real assets — we just don’t know how much.
They say 84% of those assets are “cash and cash equivalents,” which is good (assuming they’re not gaslighting us). The 6.4% in “other investments, including digital tokens” is certainly a concern.
But if USDT were to break peg, there’s a good chance someone with more detailed information on Tether’s accounts (and very deep pockets) would be willing to pay, say, 90 cents for the whole lot, knowing they’d get back 95 cents or thereabouts in a few weeks.
But, like I said, I’m guessing.
On the one hand, I think Tether will be fine.
On the other hand, the risk/reward of holding Tether at the last price of $0.993 — 0.7% upside vs. unknown downside — seems, um, lousy.
Q: What else should I be worried about?
In crypto? Probably everything.
But start with bitcoin. Speculation has been swirling around what level of bitcoin would trigger margin calls at MicroStrategy.
Michael Saylor says it’s $3,562. Others say it’s above $20,000.
I tend to take Saylor’s word for it, but a margin call at MicroStrategy is still a risk to be aware of.
And the other, potentially more lasting risk is that bitcoin is rapidly losing any claim on being a hedge against inflation.
With a 8.3% CPI, bitcoin trading around $29,000 is a combination of financial realities that will make people rethink some fundamental assumptions about crypto as a store-of-value.
Bitcoin is not the end-all, be-all of crypto, anymore, but it’s still the singular proof-of-concept for digital assets. And the concept is looking a little worse for wear at the moment.
Q: Who was behind the attack on Luna/UST? Is that a trick question? My answer is “no one.”
Because it wasn’t an attack — it was a trade.
That’s assuming there was one actor behind the initial move, which may or may not be the case, I don’t know. (The Twitter threads alleging such are unconvincing.)
But, for the sake of argument, let’s say a large fund or prop desk sold a slug of BTC and/or UST with the intention of starting a death spiral in LUNA — that is simply the normal course of business in financial markets.
When Long-Term Capital Management (LTCM) started to teeter, their book made the rounds on trading desks, and everyone positioned themselves accordingly. If someone is known to be underwater on a leveraged long position, people will try to trigger a margin call by shorting their holdings. If a company issues a death-spiral convertible, hedge funds will short the stock.
No one refers to these things as “attacks.”
Blaming a hedge fund for exploiting a market opportunity is like blaming a lion for pouncing on a wounded gazelle — it’s in their nature. It’s what they do.
And that’s not a bad thing. It’s what keeps markets efficient.
My understanding is that when any new crypto protocol launches, it’s immediately beset by dozens or hundreds hackers looking for weaknesses in the code.
That’s a good thing, as well — it’s the way crypto self-regulates.
LUNA/UST is no different, in my opinion. If you launch a protocol based on tokenomics, expect those tokenomics to be stress-tested.
Do Kwon even encouraged it:
Twitter sleuths appear to be spending a lot of time and effort trying to find out who was behind “the attack.”
The more useful post-mortem would be figuring out why it took so long.
Q: Why are you so heartless?
Sorry, I don’t mean to be.
I, of course, feel terrible for everyone who lost a significant amount of money in LUNA/UST. And also for anyone that has committed a lot of their time to building the Terra ecosystem. I think it was a worthy endeavor, and I’m sorry it failed.
But we need to remember that everything in crypto is by definition financialized — and financial systems are, by necessity, Darwinian.
There is always a lot of talk of community and mission in crypto, and that is great. Community enthusiasm is a large part of why amazing things are getting built.
It is, however, a law of physics that water will always flow downhill until it reaches the lowest level. And it’s a law of finance that markets will always find and expose the most vulnerable holders — even if those holders have the best of intentions.
Q: Was LUNA/UST always going to fail?
Purely algorithmic stablecoins, I expect, are doomed to always end in failure.
Unlike an MC Escher stairwell, self-referential, circularly collateralized tokenomics cannot go on forever.
And, as per Stein’s Law, things that cannot go on forever have to stop.
Even Do Kwon seemed to acknowledge this when he started buying BTC.
His original game plan, I think, was to develop enough use cases within the Terra ecosystem to maintain UST’s peg without resorting to the LUNA mint/burn mechanism.
The use cases were developing too slowly, however, so he changed tack and started to collateralize UST with bitcoin instead.
That just might have worked.
Given more time, he may well have been able to get UST fully backed by bitcoin and other digital assets.
But UST had gotten too big to quickly collateralize. And the sell-off in risk assets meant his runway was a lot shorter than he probably thought it was.
Do Kwon’s explicit intention was to make UST too big to fail.
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