Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,
Speaker 1: and this is Bloomberg Crypto, a new daily Bloomberg I
Speaker 1: heart podcast. Welcome, It's Thursday, June two. On today's episode,
Speaker 1: our very first Bloomberg report to Olga Karife will help
Speaker 1: us all understand the absolute meltdown of the Terra stable
Speaker 1: coin and frankly, if stable coins are actually stable. Whether
Speaker 1: you're casually crypto curious or totally coin pilled, or even
Speaker 1: a complete skeptic, there'll be something in this episode for you.
Speaker 1: But first I wanted to introduce myself and this podcast.
Speaker 1: Have you ever wondered how you make a bitcoin, or
Speaker 1: how a blockchain works, or why anyone would spend money
Speaker 1: on digital pictures of monkeys? We've got you, I've got you.
Speaker 1: I'm Stacy Marie. I've been a journalist, a product manager,
Speaker 1: even a podcast host, and I've spent my whole career
Speaker 1: at the intersection of technology and media. Right now, I'm
Speaker 1: the managing editor of Crypto for Bloomberg News and your
Speaker 1: host for this Bloomberg Crypto podcast. On this show, we'll
Speaker 1: be exploring fundamental questions about this wild crypto universe, and
Speaker 1: we're hoping you'll send us your questions too. Alongside my
Speaker 1: colleagues from around the world, I'm committed to bringing you
Speaker 1: the crypto news that matters to help you understand the who,
Speaker 1: the what, and the how, and of course why any
Speaker 1: of this matters at all. Crypto is an asset, class,
Speaker 1: an industry, a collection of contradictions, and for some people,
Speaker 1: a way of life, and it's shaking and shaping global
Speaker 1: financial markets every single day. Whether you're a bitcoin maximalist,
Speaker 1: a digital assets skept or simply crypto curious, this is
Speaker 1: a show for you beyond the ups and downs and
Speaker 1: volatility of the market itself. We look at crypto's impact
Speaker 1: on art their non fungible tokens. They basically just allow
Speaker 1: holders of like an art piece or collectible to track
Speaker 1: ownership of that art on the blockchain. On politics, and
Speaker 1: that's something important to talk about too, is this relationship
Speaker 1: between the regulators and Congress. They have tremendous agenda setting
Speaker 1: powers on culture. You know, if Justin Bieber buys aboard
Speaker 1: a yacht club, which he did, I think a lot
Speaker 1: of the community takes that as a stab of approval
Speaker 1: on regulation. The most efficient way to mine bitcoins, which
Speaker 1: is to create bitcoins, is to go to a place
Speaker 1: with the cheapest electricity possible and the less regulation possible.
Speaker 1: On society, we've really seen an upswing recently in people
Speaker 1: using social media as a tool to rip off crypto investors,
Speaker 1: and of course investors, you know, I'm thinking about the
Speaker 1: people who are investing in these kinds of services and
Speaker 1: the people who end up losing money. And you know,
Speaker 1: you could argue that this is ultimately just the rough
Speaker 1: path that decentralized financial services have to go through to
Speaker 1: become more secure, and we'll define our terms along the way.
Speaker 1: Metaverse an immersive version of the Internet where you interact
Speaker 1: and play games as a digital avatar. Join me each
Speaker 1: weekday to stay up to date on the most interesting
Speaker 1: and important crypto news. We'll be right back now onto
Speaker 1: our guest today, Olga Karif, who will explain just what
Speaker 1: an algorithmic stable coin is or was in the case
Speaker 1: of terra usd Our guest today and our first guest
Speaker 1: on this podcast. I'm very excited to introduce you all
Speaker 1: to Olga Karif, who is one of my colleagues here
Speaker 1: on the Crypto team. Olga is going to help us
Speaker 1: all understand what stable coins are, we know that some
Speaker 1: of them just aren't stable, and also why this concept
Speaker 1: in crypto has really come into i think mainstream attention
Speaker 1: over the past few weeks. Olga, thanks so much for
Speaker 1: joining us. Thank you so much for having me on
Speaker 1: your podcast. I'm so happy to be here. You know.
Speaker 1: Stable coins, of course, have been around for years, and
Speaker 1: the idea here is to allow crypto investors, for instance,
Speaker 1: to kind of stay in crypto not have to go
Speaker 1: into feat at times of high volatility in the markets.
Speaker 1: And so years ago traders started using a stable coin
Speaker 1: called tether to you know, exit positions and various coins
Speaker 1: and go into Tether, which is pegged one to one
Speaker 1: to use dollar at times of high volatility. More recently,
Speaker 1: stable coins have and then the news for sort of
Speaker 1: an unfortant reason because one stable coin called terror use
Speaker 1: d collapsed and it basically led to the destruction of
Speaker 1: more than forty billion dollars in market value. Okay, forty
Speaker 1: billion dollars is a non trivial amount of money, and
Speaker 1: I would love for you to explain a little bit
Speaker 1: more first, how terror USD is different from something like
Speaker 1: Tether and even more importantly, how it caused that value destruction,
Speaker 1: So the name stable coin can be deceiving. They are
Speaker 1: called stable coins because they're supposed to be relatively stable,
Speaker 1: whereas a lot of other cryptocurrencies are wildly volatile sometimes,
Speaker 1: and so each stable coin is supposed to be paid to, say,
Speaker 1: one year's dollar. The problem is different types of stable
Speaker 1: coins achieved this peg differently. So Tether, for instance, is
Speaker 1: at least supposed to be backed by cash like assets.
Speaker 1: And when we say backed by, what we mean is
Speaker 1: if you were to peer into Tether's accounting books, for
Speaker 1: every Tether in circulation, there should be an equivalent amount
Speaker 1: of US treasuries or dollars or something else that they
Speaker 1: could if they had to sell in order to make
Speaker 1: somebody whole for the value of their thing, right, exactly right.
Speaker 1: And then we have ter a U s D, which
Speaker 1: did not work this way at all. So it's one
Speaker 1: of the so called algorithmic stable coins that essentially use
Speaker 1: algorithms and different trading incentives to maintain their one to
Speaker 1: one peg. And according to one academic paper that I've
Speaker 1: seen in recent days, it's an impossible task. Essentially, this
Speaker 1: is kind of the conclusion right now, especially after terror
Speaker 1: use d has failed. Essentially, the way Terra u s
Speaker 1: D s PEG worked was it was pegged to another
Speaker 1: coin called Luna, and essentially one terror use D was
Speaker 1: always supposed to be equal to one dollar worth of Luna.
Speaker 1: And this is how it functioned for a while, and
Speaker 1: it worked until it didn't. And essentially what happened was
Speaker 1: there was a bank run kind of an event, and
Speaker 1: in this event, basically the most basic part about how
Speaker 1: the stable coin function did not end up working. So technically,
Speaker 1: when say terror use d dips below one dollar, you're
Speaker 1: still supposed to be able to recoup one dollar worth
Speaker 1: of Luna. What we've seen is sort of the price
Speaker 1: of Luna started dropping, and so you needed more and
Speaker 1: more Luna, So you needed more and more Luna to
Speaker 1: buy one terror USD. That's right. And actually what we've
Speaker 1: seen in a matter of days, both terror used D
Speaker 1: and Lunar values dropped into sense and then below sense.
Speaker 1: And that's how we've seen these billions of value destroyed. Basically,
Speaker 1: this war pretty large cryptocurrencies by market cap, and this
Speaker 1: market caps just evaporated in a matter of several days. Now,
Speaker 1: you said, what we saw was kind of the equivalent
Speaker 1: of a bank run. And when folks think about bank runs,
Speaker 1: there's not sort of somebody comany with like stick them up,
Speaker 1: put your cash on the thing. This is more about
Speaker 1: a collapse of confidence, a disbelief that the bank can
Speaker 1: if you were to go and say I would like
Speaker 1: to withdraw the money from my savings, that the bank
Speaker 1: would be able to give that money to you. And
Speaker 1: so it sounds to me like what you're describing was
Speaker 1: like a mass psychological effect of people who had previously
Speaker 1: believed whatever terror USDs value proposition is suddenly all coming
Speaker 1: to the conclusion that actually, there's nothing here that's right.
Speaker 1: You know, if you look at the after bath, there
Speaker 1: was nothing there. Because there were different ideas for how
Speaker 1: this stable coin could be billed out, how the situation
Speaker 1: could have been made better, but none of it ultimately
Speaker 1: came too much. And so right now the community behind
Speaker 1: terry Ust is trying to rebuild, and there is a
Speaker 1: new blockchain that's been kind of rebuilt. But ultimately what
Speaker 1: we've seen is people lost confidence in the project and
Speaker 1: in this cryptocurrencies, and ultimately they were completely decimated within
Speaker 1: several days. They didn't only lose confidence though they lost money. Yeah, right,
Speaker 1: like we've you know, we've been reporting, others have been reporting.
Speaker 1: There were some nice pieces in addition to hours in
Speaker 1: the Wall Street Journal and in rest of the world
Speaker 1: about how people all were the world who had thought, oh,
Speaker 1: this thing seems stable. It's got stable in the name,
Speaker 1: I'm going to put some significant amount of my earnings
Speaker 1: or my savings into this. In practice, though, I think
Speaker 1: sometimes it's hard for people to be like, but I
Speaker 1: don't understand how you lose money on crypto, Like how
Speaker 1: does that work practically? So I think that's a great
Speaker 1: point in a sense of you know, sometimes we forget
Speaker 1: that some portion of people who invest in crypto their speculators.
Speaker 1: They're investing money that is extra that they don't necessarily
Speaker 1: need for day to day. And then we have a
Speaker 1: lot of people who, perhaps especially from developing countries, are
Speaker 1: investing in crypto because perhaps their own currency is very volatile.
Speaker 1: There is so much distress from people who lost money here,
Speaker 1: and some of the ways it seems to me that
Speaker 1: they lost money is you know, baked into this expectation
Speaker 1: was not just if I spend one dollar, I'll have
Speaker 1: one dollar of Terra USD. But the reason that people
Speaker 1: were doing that, the reason people were investing in this
Speaker 1: wasn't only for the stability, which was important. It's because
Speaker 1: they were getting pretty high interest rates, right. Like A
Speaker 1: big value proposition of this whole ecosystem was if you
Speaker 1: quote unquote save your terror or your Luna on certain
Speaker 1: parts of you know, the crypto ecosystem, you would get
Speaker 1: the equivalent of returns that there's no way to generate
Speaker 1: that on a traditional bank account. So people were arbitraging
Speaker 1: the fact that, you know, if you have a savings account,
Speaker 1: you might get one percent interest on whatever you have
Speaker 1: in there, but if you had Terra USD, you were
Speaker 1: getting up to twenty percent of what you had in there. Right.
Speaker 1: So basically, if you had Terry us D, you could
Speaker 1: invest it into ink or protocol on the Terra blockchain
Speaker 1: and get this crazy up to returns. And I think
Speaker 1: that's one of the maybe lessons here is that there
Speaker 1: are a lot of crypto projects that seemed too good
Speaker 1: to be true and if they seem to answer they
Speaker 1: are too good to be true. Yes, definitely. Now there's
Speaker 1: many parts of finance that have over the decades offered
Speaker 1: shall we say above average guilds. That has generally ended
Speaker 1: poorly for all involved. But it does feel like this
Speaker 1: collapse had a more significantly retail effect than institutional that
Speaker 1: the people who were really hurt here were the folks
Speaker 1: in places like Argentina or Brazil who were trying to,
Speaker 1: you know, get either a little bit more stability than
Speaker 1: was offered by their local currency or tap into that yield.
Speaker 1: Have we seen additional regulatory context or questions about any
Speaker 1: of this in light of the effects on that retail
Speaker 1: investor base. Absolutely, and I think that's the big sort
Speaker 1: of effect that chair will have perhaps historically on the
Speaker 1: crypto space. Pretty much all regulators that look at the
Speaker 1: space in the US have commented on what happened with
Speaker 1: Terry U, S d SEC, et cetera. Jennet Tellen talked
Speaker 1: about it. The use of digital assets is rising very rapidly.
Speaker 1: They present the same kinds of risks, of run risks
Speaker 1: and other risks, aiment system risks, and really we need
Speaker 1: a comprehensive framework so that there are no gaps in
Speaker 1: the regulation. And so I think the result of this
Speaker 1: collapse will be perhaps more urgent development of regulation of
Speaker 1: this space. I think it's it's going to be a
Speaker 1: good thing because for several years now a lot of
Speaker 1: people and institutional investors have stayed away from Defy because
Speaker 1: it's so unregulated the wild West of crypto. Perhaps as
Speaker 1: more regulation trickles in, there will be big changes in
Speaker 1: how Defy functions, but there will perhaps be also more
Speaker 1: capital flowing into it and more investors, serious investors giving
Speaker 1: it the shot. And when we talk about Defy, you
Speaker 1: know you mentioned Anchor protocol earlier. What we're talking about
Speaker 1: is the ways in which crypto and people who believe
Speaker 1: in crypto are trying to rebuild more traditional financial services
Speaker 1: and offer things like lending or like interest or yield
Speaker 1: bearing products. Is that right? Right? So in theory, at
Speaker 1: least this could lead to additional efficiencies, but in practice
Speaker 1: what we have with Defy, at least in its present state,
Speaker 1: is people losing money, either because these projects got hacked,
Speaker 1: which we'll talk about more in future episodes, or because
Speaker 1: the projects itself just collapsed into nothingness. Absolutely, there are
Speaker 1: still it's it's such a very very risky space. I mean,
Speaker 1: all crypto is is i would say, very risky, and
Speaker 1: in this very risky space, Defy is the riskiest fire.
Speaker 1: Beware as they say, all right, well, Olga, thank you.
Speaker 1: I really appreciate you joining us to be our first
Speaker 1: guest on this podcast and helping the world understand algorithmic
Speaker 1: table coins just a little bit better. Thank you. You'll
Speaker 1: find more of Olga Curiefs reporting on the Bloomberg terminal,
Speaker 1: on Bloomberg dot com and on Twitter. She's Olga Karif
Speaker 1: that's k H A R I F on the next
Speaker 1: episode of Bloomberg Crypto. Cryptocurrencies are increasingly popular as investments.
Speaker 1: Everyone from traders on Reddit to big institutional shops seem
Speaker 1: to have some kind of crypto strategy. But what happens
Speaker 1: when the people investing in this asset class are also
Speaker 1: the ones in charge of regulating it? What are the
Speaker 1: ethical implications of having members of Congress by bitcoin? Tomorrow
Speaker 1: a chat with Bloomberg report to Akela Gardner about how
Speaker 1: to regulate the crypto regulators. I'm Stacy Marie Ishmael, and
Speaker 1: this is Bloomberg Crypto, a daily podcast from Bloomberg and
Speaker 1: I Heart Radio. For more shows from I heart Radio,
Speaker 1: visit the i heart Radio app, Apple Podcasts, or wherever
Speaker 1: you get your podcasts. Email your comments, questions or suggestions
Speaker 1: to Crypto at bloomberg dot net. Follow us on Twitter
Speaker 1: at Crypto. The producer and editor of this episode is
Speaker 1: Vicky Verglina. Our engineer is Blake Maples. Original music by
Speaker 1: Leo Sidran. Bloomberg's head of Podcasts is Francesco Levi