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Writer's pictureRich Lassiter, MD

Stablecoins. What they are and what they aren't.

By now you hopefully have an understanding of Bitcoin. If you don't, please start here. But let's move ahead assuming that you understand there are digital assets or tokens that are exchanged among users. This system is a free market, and the users should be making a trade of goods (tangible or digital) or services in exchange for the value of the token.


When the cryptocurrency exchanges first launched, the transactions were in pairs. For example, BTC-USD and ETH-USD were the two most used (traded) pairs when I created an account at Coinbase years ago. (In fact, back in 2017, the only options at CoinBase were Bitcoin, Litecoin, and Ethereum.) Much has changed since then. In order to speed up and facilitate transactions, a new digital asset was created: a stable coin.


The entire goal was to create a cryptocurrency that was pegged/tethered/stable to the U.S. Dollar. Of course the USD is the world's reserve currency, the entire planet is comfortable thinking about their goods and services in terms of the USD. So, Bitfinex, a crypto exchange in Hong Kong, launched Tether (USDT), with each token valued at $1. Tether, the company, is attempting (reasonably well so far, I would say) to allow the exchange of $1 for 1 USDT and vice versa.


I have not ever owned any Tether, as there has been much concern over how the company has managed the fiat currency that they are holding in order to issue the USDT token. There has been fear that the company Tether could not handle a run on the bank if all the users wanted to withdraw their USDT for USD in a rapid time-frame. Tether is the original stable coin, but not the last. USDC, which is issued by Circle, and domiciled and regulated in the U.S., is the second-largest. In fact, check out the top 10 tokens at CoinMarketCap.com and you will notice quite a few are stablecoins. As I write this, there are $72B USDT and $52B USDC. These will fluctuate with time as users buy more of or redeem fiat out of these coins.


One of the reasons stablecoins became so popular, is that their invention made it easy for traders to move in and out of a token. Prior to their existence, crypto traders may have to make multiple moves in order to buy or sell a smaller token on an exchange. For example, you wanted to by XYZ coin, which had a pair with BTC. You didn't own any bitcoin, so you would have to use the USD-BTC trading pair to buy BTC and then trade your BTC on the XYZ-BTC pair. After the invention of a $1 token, exchanges opened USDT-BTC, and USDT-XYZ paris, etc. The trader didn't have to worry about the price moving on his intermediate asset/coin.


BTW, I haven't owned any USDC, either. I do own GUSD, the Gemini stablecoin, which I think is equally as trustworthy as USDC. I already had an account at Gemini, and it was easy to just swap the USD for GUSD without any fees. Gemini backs


Now, one of the reasons all of this is important, is the stablecoin Terra (TUSD) just blew up. I recognize these names can be confusing, try and hang in there. This has been a collossal failure, at least $50B went to money heaven over the last week or so. Essentially, a company called Terra Form Labs, headed by a South Korean man named Do Kwon created an algorithmic stablecoin.


Basically, the ecosystem was that the stablecoin (Terra) was pegged to $1.00 if it was trading above this, the algorithm sold Terra and created Luna. If Terra was under $1, it sold Luna to create Terra, and was able to re-achieve dollar parity. Unfortunately, there was a pool of money used on a different protocol (Curve) that was used to help maintain this. Some actor (as yet unknown), withdrew a significant amount of Terra from that pool, and the algorithm couldn’t keep up. This broke the peg--Terra was trading at $0.95 or less. Then a "run on the bank" happened, and the holders of TUSD raced to redeem their tokens for $USD. The Luna assets were not just kept in USD, they had been invested in Bitcoin and other tokens. So, not only did the algorithm have to try and keep up with the Terra/Luna ratio, the Luna Foundation also had to convert their underwater assets in order to swap out those tokens for dollars. Bitcoin and other tokens were down as much as 30% from when the Terra Foundation Guard had purchased them to be a backstop for just such a "run on the bank". oops.


Everything is Great, until it's not.



The Luna token had been really accelerating in price over the last year. It peaked at around $120 in early April 2022. There was crazy demand because users could stake the TUSD on the Anchor protocol, which was built on (and maybe in conjunction with, I’m not sure) Luna and Terra. The user deposited (staked) the Terra stablecoin onto the Anchor protocol for a 20% yield. This drove up the demand for the Terra $1 token, and consequently the price of the Luna complimentary algorithm token. The Luna algorithm has now printed Trillions of tokens in order to keep up with this…there had only been billions prior to the death spiral. As I type, the Luna token is worth $0.0001408 (yes, that is the correct number of zeros after the period).


I never purchased any of the Terra, Luna, or got involved on the Anchor protocol. I certainly admit that I thought about it. I just couldn't get confident on the math. Twenty percent return is obviously very enticing, but also sounded too good to be true. Well, it was. Perhaps this system would have worked as long as the number always goes up. However, the number DOESN'T always go up. At least, not in the short term. I admit that I didn't warn anyone not to use it, but I had read enough warnings to not invest my own capital (or advise you to invest yours).


Watch out for people on Twitter or in the government saying 'I told you so,' when they really didn't. This event DOES hurt many people. From what seems to be known right now, one or more actors saw a weakness in this free market and capitalized on it. They may have made off with around $1B, but they wrecked others to the tune of $50B. This is a hard lesson to learn. The pain from this event is going to stick around for a long time.


Meanwhile, the Circle and Gemini stablecoins are backed with USD in banks. Tether has paid fines to US states for not disclosing exactly what assets are backing their token. It seems to me that USDC and GUSD are superior products to USDT. There are institutions like Celsius, Voyager and Gemini that will pay you yield rewards of around 8% APY your stablecoin. I admit that coming from the traditional banking world of 0.5% interest that even this sounds 'too good to be true.' When I first placed stablecoin assets at some of these institutions, the rates have been as high as 14%! The rates fluctuate, based on market demand. I cannot believe that these rates in the mid-teens are permanent, but I have seen (and received) 8% or more for over a year. I have my emergency fund earning that interest reward instead of sitting in a traditional bank collecting dust. BTW, the SEC has fined BlockFi for calling the reward interest. Apparently it is OK for banks to lend out your assets and call the return interest, but not okay for crypto companies to do the same.


Do your own research. Don't risk more than you can afford to lose.

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