Hello, And Not So-Stable Stablecoins

coin and frankly, if stable coins are actually stable. Whether you're casually crypto curious or totally coin pilled, or even a complete skeptic, there'll be something in this episode for you. But first I wanted to introduce myself and this podcast. Have you ever wondered how you make a bitcoin, or how a blockchain works, or why anyone would spend money on digital pictures of monkeys? We've got you, I've got you.

I'm Stacy Marie. I've been a journalist, a product manager, even a podcast host, and I've spent my whole career at the intersection of technology and media. Right now, I'm the managing editor of Crypto for Bloomberg News and your host for this Bloomberg Crypto podcast. On this show, we'll be exploring fundamental questions about this wild crypto universe, and

we're hoping you'll send us your questions too. Alongside my colleagues from around the world, I'm committed to bringing you the crypto news that matters to help you understand the who, the what, and the how, and of course why any of this matters at all. Crypto is an asset, class, an industry, a collection of contradictions, and for some people, a way of life, and it's shaking and shaping global

financial markets every single day. Whether you're a bitcoin maximalist, a digital assets skept or simply crypto curious, this is a show for you beyond the ups and downs and volatility of the market itself. We look at crypto's impact on art their non fungible tokens. They basically just allow holders of like an art piece or collectible to track ownership of that art on the blockchain. On politics, and that's something important to talk about too, is this relationship

between the regulators and Congress. They have tremendous agenda setting powers on culture. You know, if Justin Bieber buys aboard a yacht club, which he did, I think a lot of the community takes that as a stab of approval on regulation. The most efficient way to mine bitcoins, which is to create bitcoins, is to go to a place with the cheapest electricity possible and the less regulation possible.

On society, we've really seen an upswing recently in people using social media as a tool to rip off crypto investors, and of course investors, you know, I'm thinking about the people who are investing in these kinds of services and the people who end up losing money. And you know, you could argue that this is ultimately just the rough path that decentralized financial services have to go through to become more secure, and we'll define our terms along the way.

Metaverse an immersive version of the Internet where you interact and play games as a digital avatar. Join me each weekday to stay up to date on the most interesting and important crypto news. We'll be right back now onto our guest today, Olga Karif, who will explain just what an algorithmic stable coin is or was in the case of terra usd Our guest today and our first guest on this podcast. I'm very excited to introduce you all to Olga Karif, who is one of my colleagues here

on the Crypto team. Olga is going to help us all understand what stable coins are, we know that some of them just aren't stable, and also why this concept in crypto has really come into i think mainstream attention over the past few weeks. Olga, thanks so much for joining us. Thank you so much for having me on your podcast. I'm so happy to be here. You know.

Stable coins, of course, have been around for years, and the idea here is to allow crypto investors, for instance, to kind of stay in crypto not have to go into feat at times of high volatility in the markets. And so years ago traders started using a stable coin called tether to you know, exit positions and various coins and go into Tether, which is pegged one to one

to use dollar at times of high volatility. More recently, stable coins have and then the news for sort of an unfortant reason because one stable coin called terror use d collapsed and it basically led to the destruction of

more than forty billion dollars in market value. Okay, forty billion dollars is a non trivial amount of money, and I would love for you to explain a little bit more first, how terror USD is different from something like Tether and even more importantly, how it caused that value destruction,

So the name stable coin can be deceiving. They are called stable coins because they're supposed to be relatively stable, whereas a lot of other cryptocurrencies are wildly volatile sometimes, and so each stable coin is supposed to be paid to, say, one year's dollar. The problem is different types of stable coins achieved this peg differently. So Tether, for instance, is at least supposed to be backed by cash like assets.

And when we say backed by, what we mean is if you were to peer into Tether's accounting books, for every Tether in circulation, there should be an equivalent amount of US treasuries or dollars or something else that they could if they had to sell in order to make somebody whole for the value of their thing, right, exactly right. And then we have ter a U s D, which

did not work this way at all. So it's one of the so called algorithmic stable coins that essentially use algorithms and different trading incentives to maintain their one to one peg. And according to one academic paper that I've seen in recent days, it's an impossible task. Essentially, this is kind of the conclusion right now, especially after terror

use d has failed. Essentially, the way Terra u s D s PEG worked was it was pegged to another coin called Luna, and essentially one terror use D was always supposed to be equal to one dollar worth of Luna. And this is how it functioned for a while, and it worked until it didn't. And essentially what happened was there was a bank run kind of an event, and in this event, basically the most basic part about how

the stable coin function did not end up working. So technically, when say terror use d dips below one dollar, you're still supposed to be able to recoup one dollar worth of Luna. What we've seen is sort of the price of Luna started dropping, and so you needed more and more Luna, So you needed more and more Luna to buy one terror USD. That's right. And actually what we've seen in a matter of days, both terror used D and Lunar values dropped into sense and then below sense.

And that's how we've seen these billions of value destroyed. Basically, this war pretty large cryptocurrencies by market cap, and this market caps just evaporated in a matter of several days. Now, you said, what we saw was kind of the equivalent of a bank run. And when folks think about bank runs, there's not sort of somebody comany with like stick them up,

put your cash on the thing. This is more about a collapse of confidence, a disbelief that the bank can if you were to go and say I would like to withdraw the money from my savings, that the bank would be able to give that money to you. And so it sounds to me like what you're describing was like a mass psychological effect of people who had previously believed whatever terror USDs value proposition is suddenly all coming to the conclusion that actually, there's nothing here that's right.

You know, if you look at the after bath, there was nothing there. Because there were different ideas for how this stable coin could be billed out, how the situation could have been made better, but none of it ultimately came too much. And so right now the community behind terry Ust is trying to rebuild, and there is a

new blockchain that's been kind of rebuilt. But ultimately what we've seen is people lost confidence in the project and in this cryptocurrencies, and ultimately they were completely decimated within several days. They didn't only lose confidence though they lost money. Yeah, right, like we've you know, we've been reporting, others have been reporting.

There were some nice pieces in addition to hours in the Wall Street Journal and in rest of the world about how people all were the world who had thought, oh, this thing seems stable. It's got stable in the name, I'm going to put some significant amount of my earnings or my savings into this. In practice, though, I think sometimes it's hard for people to be like, but I don't understand how you lose money on crypto, Like how

does that work practically? So I think that's a great point in a sense of you know, sometimes we forget that some portion of people who invest in crypto their speculators. They're investing money that is extra that they don't necessarily need for day to day. And then we have a lot of people who, perhaps especially from developing countries, are investing in crypto because perhaps their own currency is very volatile.

There is so much distress from people who lost money here, and some of the ways it seems to me that they lost money is you know, baked into this expectation was not just if I spend one dollar, I'll have one dollar of Terra USD. But the reason that people were doing that, the reason people were investing in this wasn't only for the stability, which was important. It's because

they were getting pretty high interest rates, right. Like A big value proposition of this whole ecosystem was if you quote unquote save your terror or your Luna on certain parts of you know, the crypto ecosystem, you would get the equivalent of returns that there's no way to generate

that on a traditional bank account. So people were arbitraging the fact that, you know, if you have a savings account, you might get one percent interest on whatever you have in there, but if you had Terra USD, you were getting up to twenty percent of what you had in there. Right. So basically, if you had Terry us D, you could invest it into ink or protocol on the Terra blockchain

and get this crazy up to returns. And I think that's one of the maybe lessons here is that there are a lot of crypto projects that seemed too good to be true and if they seem to answer they are too good to be true. Yes, definitely. Now there's many parts of finance that have over the decades offered shall we say above average guilds. That has generally ended

poorly for all involved. But it does feel like this collapse had a more significantly retail effect than institutional that the people who were really hurt here were the folks in places like Argentina or Brazil who were trying to, you know, get either a little bit more stability than was offered by their local currency or tap into that yield. Have we seen additional regulatory context or questions about any of this in light of the effects on that retail

investor base. Absolutely, and I think that's the big sort of effect that chair will have perhaps historically on the crypto space. Pretty much all regulators that look at the space in the US have commented on what happened with Terry U, S d SEC, et cetera. Jennet Tellen talked about it. The use of digital assets is rising very rapidly.

They present the same kinds of risks, of run risks and other risks, aiment system risks, and really we need a comprehensive framework so that there are no gaps in the regulation. And so I think the result of this collapse will be perhaps more urgent development of regulation of this space. I think it's it's going to be a good thing because for several years now a lot of people and institutional investors have stayed away from Defy because

it's so unregulated the wild West of crypto. Perhaps as more regulation trickles in, there will be big changes in how Defy functions, but there will perhaps be also more capital flowing into it and more investors, serious investors giving it the shot. And when we talk about Defy, you

know you mentioned Anchor protocol earlier. What we're talking about is the ways in which crypto and people who believe in crypto are trying to rebuild more traditional financial services and offer things like lending or like interest or yield

bearing products. Is that right? Right? So in theory, at least this could lead to additional efficiencies, but in practice what we have with Defy, at least in its present state, is people losing money, either because these projects got hacked, which we'll talk about more in future episodes, or because the projects itself just collapsed into nothingness. Absolutely, there are

still it's it's such a very very risky space. I mean, all crypto is is i would say, very risky, and in this very risky space, Defy is the riskiest fire. Beware as they say, all right, well, Olga, thank you. I really appreciate you joining us to be our first guest on this podcast and helping the world understand algorithmic table coins just a little bit better. Thank you. You'll find more of Olga Curiefs reporting on the Bloomberg terminal,

on Bloomberg dot com and on Twitter. She's Olga Karif that's k H A R I F on the next episode of Bloomberg Crypto. Cryptocurrencies are increasingly popular as investments. Everyone from traders on Reddit to big institutional shops seem to have some kind of crypto strategy. But what happens when the people investing in this asset class are also the ones in charge of regulating it? What are the

ethical implications of having members of Congress by bitcoin? Tomorrow a chat with Bloomberg report to Akela Gardner about how to regulate the crypto regulators. I'm Stacy Marie Ishmael, and this is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I heart Radio, visit the i heart Radio app, Apple Podcasts, or wherever you get your podcasts. Email your comments, questions or suggestions to Crypto at bloomberg dot net. Follow us on Twitter

at Crypto. The producer and editor of this episode is Vicky Verglina. Our engineer is Blake Maples. Original music by Leo Sidran. Bloomberg's head of Podcasts is Francesco Levi