🧘‍♂️ALERT: Important Crypto Update

Market Meditations | May 26, 2022

Dear Meditators

Stablecoins have gone from iconic to ironic as stability proves elusive for some coins.

While Terra tries to rebuild, the effects of UST’s collapse continue to reverberate throughout the cryptocurrency industry.

It seems that algorithmic stablecoins may be suffering the most, but is the cause fear or fact?

Today’s Meditations: 

  • Algorithmic Stablecoins: Everything You Need To Know About Them 
  • Terra’s Latest Plans
  • Defi is Headed to the Moon

⏰ Top Headlines


Algorithm ‘N Blues

USDC is a fiat-back stablecoin ranked #5 by market cap, while MIM and FRAX are newer, algorithmic coins. Data shows that volatility is affecting the latter much more severely.

USDC ‘s market cap movement is muted in comparison, and recently money has been flowing into USDC while MIM and FRAX are seeing outflows.

Since the perceived risk of algorithmic stablecoins is higher than fiat-backed, why would anyone buy in?

  1. Decentralisation. Fiat-backed stablecoins require transparent, instantly accessible reserves. This is a tall order, and better suited for holding by centralised entities. Algorithmic collateralisation and arbitrage go hand-in-hand with decentralisation.
  2. Flexible or no collateral required. Accumulating the backing necessary to match a stablecoin’s supply is an insurmountable task for many startups. Some algos, like UST (much to its chagrin), are completely uncollateralised, relying instead on buyers and sellers to maintain the price.
  3. Incentives. Using algorithmic models, incentivisation like earning interest on collateral provided in order to mint stablecoins is possible.

But nothing is without downside, and in the case of many “algos”, the cons outweigh the pros.

  1. Algorithms are hard. Even blockchain engineers can have a difficult time interpreting and anticipating code behavior to accurately predict how downward pressure can affect a peg.
  2. Pegs are more susceptible. Fiat-backed coins aspire to always be valued at a 1:1 ration against another asset by holding a parallel amount of said asset. Algorithmic coins employ many moving parts in combinations to maintain their peg, increasing risks.
  3. Oracles aren’t perfect. Algorithmic stablecoins rely on oracles to provide price data. Oracles sometimes malfunction or fail, resulting in an immediate impact on peg strength.

Two relatively new algorithmic coins have captured substantial attention. MIM and FRAX command market caps in the billions of dollars.

Magic Internet Money

  • Magic Internet Money (MIM) is minted when users deposit assets into the protocol. Depositing approved forms of liquidity returns interest-bearing LP tokens (ibTKNS).
  • These tokens earn interest while serving as collateral for the minted MIM stablecoin.
  • If the value of deposited collateral drops below the loan-to-value ratio, liquidation can occur.

Frax

  • FRAX is backed by collateral and uses an algorithm to burn and redeem FXS – the protocol’s governance token.
  • FRAX is minted when collateral and FXS are deposited into the protocol. The amount of collateral is determined by a collateralisation ratio.
  • When new FRAX coins are minted, FXS is burned proportionally to the uncollateralised amount, resulting in overall decrease in the amount of FXS in circulation.

Both Frax and MIM, and others like DAI and USDN, rely on baskets of diversified cryptocurrencies to increase stability and mitigate risk of depegging.

Ready to al-go? Not so fast. Avoid the next UST by being accountable for your investments.

  • Governance. Many algorithmic stablecoins are governed by DAO structures. Before taking a project’s merit for granted, look at the governance architecture to make sure it is both reliable and responsible.
  • Adoption Rates. If the stablecoin collateralises or relies on other tokens to maintain a peg, they need to be diligently vetted for security, popularity and ecosystem adoption.
  • Peg Performance. Examine how well the coin’s track record accurately maintains its peg. The larger sample, the better. Newer coins are higher-risk by nature. Take note of how the stablecoin’s peg performance compares to others.

Interested in Frax? Check out our FRAX Guide. If you believe in magic (internet money), open your spellbook and start reading here.


? Terra Backers Vote to Revive Luna

By now, everyone has heard about the $60 billion collapse that happened with the Terra ecosystem. Terra backers have recently voted to revive Luna – but not UST. We are going to summarize parts of the revival plan to get a better sense of how exactly Luna will be coming back.

  • The new Terra chain will be created without the algorithmic stablecoin. The old chain will now be called Terra Classic and the new chain will be Terra.
  • Luna will be airdropped across holders, ‘stakers,’ and developers. The specific token distribution will be 30% to the community pool, 35% to the “pre-attack” Luna holders, 10% to the “pre-attack” UST holders, 10% to the “post-attack” Luna holders, and 15% to the “post-attack” UST holders.
  • Terra will be a full community-owned chain.
  • The network security will be incentivized with token inflation. The target staking rewards they talked about was 7% p.a.
  • Essential app developers will receive an emergency allocation and have access to developer alignment programs and developer mining programs. All of these have specific deadlines as to when their product must be launched. If not launched, they will return funds.

For more detailed information, be sure to read the entire Terra Ecosystem Revival Plan.

Though Luna will be coming back, it was not without disagreement from some. DeFi project Lido Finance voted overwhelmingly against supporting the new Terra blockchain. Less than 5.5% voted in favor of the revival plan that was approved by network validators.


? WEN MOON? 

Filecoin has partnered with Lockheed Martin, a world-leading contractor in the aerospace and defense industry, to bring decentralized file storage to the moon. The Filecoin Foundation’s mission is to store humanity’s most important information, but this collaboration could mean storing extraterrestrial and intergalactic information as well.

  • Marta Belcher, the president of the Filecoin Foundation has explained that today’s internet model wasn’t made for space.
  • Clicking a link now requires that data be retrieved from a centralized server and if you were on the moon this data retrieval from earth would cause a multi-second delay.
  • The foundational technology of Filecoin is Interplanetary File System or IPFS, a decentralized protocol for storing and sharing data using content-ids.
  • IPFS allows multiple computers to store the same files so that if one were to be unavailable for some reason, the data could be retrieved from another source.
  • You can also retrieve data from the closest source, reducing lag time. This could be especially helpful if another computer on the moon had already downloaded the data you want to retrieve because it would only have to travel a few miles as opposed to thousands of miles.
  • Web 3 projects commonly prefer the decentralized IPFS protocol over the traditional centralized storage solutions such as Google or Amazon.

At a time when the market is still trembling from billions of dollars that evaporated with the catastrophic collapse of LUNA and UST, Filecoin may be the one cryptocurrency with an actual moon mission on the roadmap!


Twitter 

  • DeFi insurance provider @InsurAce_io got a lot of criticism after cutting in half the 15 days to file Terra-related claims, considered by some community members as a “dirty move”. The firm will pay $11 million while some claims are still unheard of. – Cointelegraph

?  Watch 

  1. What is MakerDAO and how does DAI work?

? Read 

  1. Introduction to Abracadabra
  2. FRAX Guide

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??‍♂️✍️ Stories in this newsletter were written by Misael Calleja, Kai.A, Nick T., Max P., Kimia K., Ellen B. and Koroush AK. Graphics were produced by Ellen B.


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