"On 10 May 2022, the price of TerraUSD, an algorithmic stablecoin operating on the Terra blockchain, fell and it lost its peg to one US dollar. Using the devaluation of the TerraUSD peg as a case study, this column shows how algorithmic stablecoins are vulnerable to speculative attacks when the system is under-collateralised. The authors point to solutions – stable collateral and over-collateralisation – to stabilise the peg."
Built to Fail: The Inherent Fragility of Algorithmic Stablecoins
"This Article argues that algorithmic stablecoins are fundamentally flawed because they rely on three factors which history has shown to be impossible to control. First, they require a support level of demand for operational stability. Second, they rely on independent actors with market incentives to perform price-stabilizing arbitrage. Finally, they require reliable price information at all times. None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility. "
What business model for the Digital Euro? Lessons from Brazil and Switzerland
"In this paper, we show that approaches based on this type of CBDC design are unlikely to satisfy user demand. We argue that it is more important to focus on the payment system. Drawing on the experiences in Brazil (Pix) and Switzerland (Twint), we show that successful payment systems do not require users to hold system-specific payment assets, making them convenient and accessible. An important motive for the ECB to develop a digital euro is to preserve monetary sovereignty and strategic autonomy. A European payment system could ensure autonomy over such a critical infrastructure of an economy. For it to succeed, the ECB should look to and learn from the best examples."
Monetary policy and financial stability implications of central bank digital currencies
"This policy note takes stock of the advances in research on CBDCs, looking at their implications for both financial stability and monetary policy.3 And it discusses areas where we can further expand the frontiers of our knowledge on this topic."
A quick note on Tether redemptions during the current crypto bloodbath
"This suggests that Tether is in a contraction phase, just like USD Coin. But Tether's contraction is more muted, at least for now. USD Coin has shrunk by 11%. Using the quantity of Tethers in Tether's treasury wallet as our measure, Tether has contracted by only 4%."
Why financial engineering has gone full circle with Terra
The crypto market was always going to be vulnerable to the return of a positive yielding fiat environment. This is because its gains were always likely the function of an excessively cheap debt financing world. If that’s true, it’s entirely possible that the last 10 years or so of sky-rocketing crypto gains were largely a transfer of “cheap money” financial profiteering, which — were not for the post GFC regulatory environment — would otherwise have been captured by the banking industry in the form of sky-high bank equity valuations.
Price discovery for bitcoin takes place in derivatives trades where tether serves as the margin and settlement currency. What trading of the dollar against the euro is to currencies, trading of bitcoin against tether is to crypto. On the Binance exchange, the pricing of reassuringly named perpetual swap contracts involving bitcoin and tether drives bitcoin prices in US dollars and more broadly influences prices across crypto... Without tether, or at least without stablecoins, it is not clear how the crypto complex functions. Problems with the vehicle currency would impair the liquidity of the whole crypto complex, just as the “dollar shortage” of late 2008 impaired the liquidity of the whole foreign exchange market. Less liquid assets are worth less. And if a prominent stablecoin becomes essentially a worthless entry on nobody’s spreadsheet, it would suggest other crypto could go to zero.
Chile's central bank pushes back digital currency decision
Banco Central de Chile said that although a central bank digital currency (CBDC) could improve payment systems and mitigate risks, a deeper cost and benefit analysis is required and it would publish a new report towards the end of the year. The central bank said CBDC would allow the benefits associated with digital transformation to be enhanced, while mitigating some of its risks, adding that the currency could help develop a more competitive, resilient and inclusive payment system. However, a final decision on this requires a more in-depth analysis of its costs and benefits, as well as a more complete comparison with other policy alternatives that address the same challenges.
Terra Blockchain Halted To 'Prevent Attacks' After Luna Token Crashes Nearly 100% Overnight
Terraform Labs announced that the blockchain's miners had decided to halt the Terra blockchain in order to "prevent governance attacks" following "severe [luna] inflation." Later, Terra said validators are working to restart the network "in a few minutes.
Terra Proposes Token Burn and Increase in Pool Size to Stop UST Dilution
"In a proposal put forward to token holders, Terra said that it wants to burn the nearly 1 billion UST (roughly $690 million) in the community pool while increasing the Base Pool of LUNA available to 100 million which in turn increases minting capacity to over $1 billion. This will help expedite the outflows of UST from the system, and thus pushing it back closer to its peg, while pushing down the price of Luna. “Currently, the burning of UST is too slow to keep pace with the demand for excess UST to exit the system, which is hindered by the BasePool size,” reads the proposal. “Eliminating a significant chunk of the excess UST supply at once will alleviate much of the peg pressure on UST.”"
"An “algorithmic stablecoin” sounds complicated, and there are a lot of people with incentives to pretend that it is complicated, but it is not. Here is how an algorithmic stablecoin works"
UST’s Do Kwon Was Behind Failed Stablecoin Basis Cash
"Do Kwon, the CEO of Terra creator Terraform Labs, was one of the pseudonymous co-founders behind the failed algorithmic stablecoin Basis Cash, CoinDesk has learned."
Terra’s stablecoin does its own 2008 crisis — UST crashes and takes Bitcoin with it
David Gerard has provided some excellent analysis of the continuing crash of the TerraUSD (UST) algorithmic stablecoin and the resulting fallout on broader crypto-asset markets. TerraUSD tumbled to as low as $0.30 on May 11, on fears of a "death spiral" in an asset that is supposed to be pegged to the U.S. dollar. Luna, the crypto-asset intimately tied to TerraUSD, was down almost 90% on the day as confidence in the network collapsed, and Bitcoin and Avalanche (AVAX) are also paying the price for being collateral assets that maintain TerraUSD's peg.
Terra founder Do Kwon shares plan to save the UST stablecoin peg
"In a nutshell, the “decentralized” stablecoin protocol UST has come up with a preliminary solution to its disastrous situation where its peg to the U.S. dollar has broken. The process should reinforce the burning of UST, which so far, has been ineffective in achieving dollar parity for the stablecoin."
To some extent, it's really important for an algorithmic stablecoin to exist, in order for crypto or defi to reach its full potential. Backed stablecoins (like Tether or USDC) are at risk of censorship and seizures. As long as there's money in a regulated bank account somewhere bolstering the value of the coin, that's something that law enforcement or regulators can go after, seize, or set constraining rules around its use. That risk is inconsistent with the crypto ethos, hence the desire for something that's cash-like, but doesn't actually touch regulated financial entities, and can't be seized etc. Here's the thing though, just because it may be a crucial component of the future DeFi vision doesn't mean it's necessarily going to be possible. The question remains how can you just create an asset and set the price unless you have an infinite amount of money, or some other persistent source of cash flow, to back it?
Terra’s stablecoin does its own 2008 crisis — UST crashes and takes Bitcoin with it
"Terra built itself its own small 2008 financial crisis with “stable” assets built from chained boxes of worthless trash, and the whole thing fell over in a stiff breeze and crashed Bitcoin in the process."
UST’s Bitcoin Reserve Too Late in Coming to Save Dollar Peg
"Luna Foundation Guard (LFG)'s proposed cryptocurrency reserve to guard against a collapse of the UST stablecoin came too late to guard against the past week's market turmoil."
"For now, MakerDAO remains the premier decentralized stablecoin with over-collateralized crypto reserves backing the DAI stablecoin. The race to develop the first under-collateralized stablecoins remains to be won as projects like USDN on the Near Protocol or Frax Share on Ethereum gain popularity."
Nigerian CBDC Wallet Update to Enable Utility Payments, USSD Functionality to Be Added
"Jelil also is quoted in the report revealing how the CBN’s plan to add the USSD functionality to the wallet opens the door for non-account holders to use the CBDC. According to one financial specialist and blogger, USSD may be the best available technology that can be used to deliver mobile financial services to low-income customers."
Central Bank Of Philippines to Pilot Test CBDC in Q4
"The governor of the Philippine central bank said in an interview that they are negotiating with various banks and financial institutions to conduct a pilot test of a central bank digital currency (CBDC) in Q4."
"Following its successful pilot program, Jamaica’s central bank digital currency is set to become publicly available this summer, Central Bank of Jamaica Governor Richard Byles told Blockworks."
"The basic thing that makes Terra valuable is confidence in it. The essential source of this confidence is ... just sort of recursive social belief? If you think that everyone else will treat Terra as worth a dollar, then you will treat it as worth a dollar, and you won’t sell it for $0.90 in a panic, which means that it won’t go down to $0.90, etc. But if you think that everyone else will treat Terra as worth zero, then you will dump it as fast as you can at whatever price you can get, which means that it will go down below $0.90, etc."
Unstable Stablecoin: How Crypto’s Crash Broke The Buck For TerraUSD
"TerraUSD (UST), a digital token with a $16 billion market capitalization that is designed to maintain a 1:1 peg with the dollar, known as a stablecoin, nosedived over the past 24 hours. Its price fell below $.65, before somewhat recovering to $0.93 as of this writing. In other words, UST failed spectacularly at the one thing that it was supposed to do - maintain parity with the dollar."
Central Bank of Nigeria Lagos Branch Controller Bariboloka Koyor reportedly there is going to be an upgrade on the eNaira speed wallet app that will allow it to do transactions such as paying for utilities and even flight tickets. Going forward it will also be used by the government to disburse funds that they want to give to alleviate poverty. Explaining the difference between the eNaira and the internet banking services offered by banks, Koyor pointed to the speed of transaction settlement and that there are no charges.
Wary of Crypto, Tanzania Shifts Closer to Own Digital Currency
Bank of Tanzania Governor Florens Luoga reportedly said that the central bank is edging closer to introducing a CBDC to help counter the rising popularity of cryptocurrencies in the nation. “It’s important for us to provide a central bank digital currency as a safe alternative because many people are being affected by cryptocurrency speculators.” The bank can’t ignore the technological advancement of money, and it has sent its officials to countries with more experience in CBDCs, including Nigeria, to learn from them.
Chilean Digital Peso Would Need to Work Offline, Central Bank Governor Says
Banco Central de Chile Governor Rosanna Costa reportedly said that Chile's central bank digital currency (CBDC) would need to accept offline payments, but added that no final decision had been taken on whether to issue a digital form of the Chilean peso. She said that an offline system should “allow the authorities to trace the transaction afterwards,” while safeguarding personal data, adding that the technology to do so was “not necessarily efficient today.”
The Bahamas’ ‘Sand Dollar’ Needs Improved Cybersecurity, IMF Says
The International Monetary Fund (IMF) said that the Bahamas’ Sand Dollar central bank digital currency (CBDC) needs better reach and more security to achieve its aims. The IMF noted the Sand Dollar represents only 0.1% of currency in circulation. The country’s central bank “should continue strengthening internal capacity – including on cybersecurity and the resilience of systems associated with the Sand Dollar,” adding that there are currently “limited avenues to use the Sand Dollar.” https://www.imf.org/en/Publications/CR/Issues/2022/05/06/The-Bahamas-2022-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-517631
Bank of Israel still unsure on digital shekel but garners public support
The Bank of Israel has received public support for its plans to possibly issue a digital shekel on grounds it would help the economy by supporting innovation in the payments system, reducing the amount of cash and bolstering the fintech sector. Although the central bank has not made a final decision on whether it will issue a digital shekel, all of the responses to the public consultation indicate support for continued research regarding the various implications on the payments market, financial and monetary stability, legal and technological issues, and more. Some want full anonymity like cash, while others believe a digital shekel should be subject to money laundering rules and helping the war on the "black economy." Also, a digital shekel should also come at a zero or low costs to business owners and consumers and be easy to use for all, including the elderly. https://www.boi.org.il/en/NewsAndPublications/PressReleases/Pages/9-5-22.aspx
UST Stablecoin Falls Below Dollar Peg for Second Time in 48 Hours
TerraUSD (UST), the the third largest stablecoin by market capitalization and the largest algorithmic stablecoin, has lost its dollar peg. The first depeg took place on May 7 (Saturday) and after recovering the next day, the peg broke again today (Monday, May 9). This isn't UST's first depeg, nor its largest, but it marks the first time it has lost its peg since it started building out Bitcoin and Avalanche reserves. Today’s depeg comes after the Luna Foundation Guard announced Sunday night that $1.5 billion of its massive bitcoin reserves would be “loaned” out to professional market makers to proactively defend UST’s dollar peg.
