The current crash in crypto valuations is a wakeup call. Should it amplify, it will trigger a radical reassessment. But, just as excessive hype fuelled speculation, a collapse in valuations may lead to an indiscriminate condemnation of digital money and an underestimation of its potential benefits. In this column I try, in twelve brief points, to take stock of developments over the last five years. Looking at the mix of technological and monetary innovations, it is important to separate truth from exaggerations and manifest errors.
1. Starting from current events, Terra, which collapsed one month ago, was a pure Ponzi scheme. Basically, Terra was anchored to – and redeemable into – Luna, another stablecoin which, itself, was anchored on nothing. As if the obscure technicalities of conversion were not enough, a mechanism offered a 20% annual interest rate for deposits in Terra. That it was allowed to prosper and grow to an outstanding amount close to $12 billion does not reflect well on supervisors.
Terra belonged to a category of so called ‘algorithmic’ stablecoins whose viability is highly problematic. Their stability comes from an algorithm implementing open market operations. But open market against which assets? If those assets are issued inside the same stablecoin system, there is an obvious circularity and stabilisation is an illusion (Cochrane 2018). If they are issued outside, then the whole scheme is equivalent to backing. Algorithmic…
