WEBVTT - Hello, And Not So-Stable Stablecoins

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>and this is Bloomberg Crypto, a new daily Bloomberg I

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<v Speaker 1>heart podcast. Welcome, It's Thursday, June two. On today's episode,

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<v Speaker 1>our very first Bloomberg report to Olga Karife will help

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<v Speaker 1>us all understand the absolute meltdown of the Terra stable

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<v Speaker 1>coin and frankly, if stable coins are actually stable. Whether

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<v Speaker 1>you're casually crypto curious or totally coin pilled, or even

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<v Speaker 1>a complete skeptic, there'll be something in this episode for you.

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<v Speaker 1>But first I wanted to introduce myself and this podcast.

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<v Speaker 1>Have you ever wondered how you make a bitcoin, or

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<v Speaker 1>how a blockchain works, or why anyone would spend money

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<v Speaker 1>on digital pictures of monkeys? We've got you, I've got you.

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<v Speaker 1>I'm Stacy Marie. I've been a journalist, a product manager,

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<v Speaker 1>even a podcast host, and I've spent my whole career

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<v Speaker 1>at the intersection of technology and media. Right now, I'm

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<v Speaker 1>the managing editor of Crypto for Bloomberg News and your

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<v Speaker 1>host for this Bloomberg Crypto podcast. On this show, we'll

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<v Speaker 1>be exploring fundamental questions about this wild crypto universe, and

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<v Speaker 1>we're hoping you'll send us your questions too. Alongside my

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<v Speaker 1>colleagues from around the world, I'm committed to bringing you

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<v Speaker 1>the crypto news that matters to help you understand the who,

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<v Speaker 1>the what, and the how, and of course why any

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<v Speaker 1>of this matters at all. Crypto is an asset, class,

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<v Speaker 1>an industry, a collection of contradictions, and for some people,

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<v Speaker 1>a way of life, and it's shaking and shaping global

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<v Speaker 1>financial markets every single day. Whether you're a bitcoin maximalist,

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<v Speaker 1>a digital assets skept or simply crypto curious, this is

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<v Speaker 1>a show for you beyond the ups and downs and

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<v Speaker 1>volatility of the market itself. We look at crypto's impact

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<v Speaker 1>on art their non fungible tokens. They basically just allow

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<v Speaker 1>holders of like an art piece or collectible to track

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<v Speaker 1>ownership of that art on the blockchain. On politics, and

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<v Speaker 1>that's something important to talk about too, is this relationship

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<v Speaker 1>between the regulators and Congress. They have tremendous agenda setting

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<v Speaker 1>powers on culture. You know, if Justin Bieber buys aboard

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<v Speaker 1>a yacht club, which he did, I think a lot

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<v Speaker 1>of the community takes that as a stab of approval

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<v Speaker 1>on regulation. The most efficient way to mine bitcoins, which

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<v Speaker 1>is to create bitcoins, is to go to a place

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<v Speaker 1>with the cheapest electricity possible and the less regulation possible.

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<v Speaker 1>On society, we've really seen an upswing recently in people

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<v Speaker 1>using social media as a tool to rip off crypto investors,

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<v Speaker 1>and of course investors, you know, I'm thinking about the

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<v Speaker 1>people who are investing in these kinds of services and

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<v Speaker 1>the people who end up losing money. And you know,

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<v Speaker 1>you could argue that this is ultimately just the rough

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<v Speaker 1>path that decentralized financial services have to go through to

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<v Speaker 1>become more secure, and we'll define our terms along the way.

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<v Speaker 1>Metaverse an immersive version of the Internet where you interact

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<v Speaker 1>and play games as a digital avatar. Join me each

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<v Speaker 1>weekday to stay up to date on the most interesting

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<v Speaker 1>and important crypto news. We'll be right back now onto

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<v Speaker 1>our guest today, Olga Karif, who will explain just what

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<v Speaker 1>an algorithmic stable coin is or was in the case

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<v Speaker 1>of terra usd Our guest today and our first guest

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<v Speaker 1>on this podcast. I'm very excited to introduce you all

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<v Speaker 1>to Olga Karif, who is one of my colleagues here

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<v Speaker 1>on the Crypto team. Olga is going to help us

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<v Speaker 1>all understand what stable coins are, we know that some

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<v Speaker 1>of them just aren't stable, and also why this concept

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<v Speaker 1>in crypto has really come into i think mainstream attention

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<v Speaker 1>over the past few weeks. Olga, thanks so much for

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<v Speaker 1>joining us. Thank you so much for having me on

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<v Speaker 1>your podcast. I'm so happy to be here. You know.

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<v Speaker 1>Stable coins, of course, have been around for years, and

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<v Speaker 1>the idea here is to allow crypto investors, for instance,

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<v Speaker 1>to kind of stay in crypto not have to go

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<v Speaker 1>into feat at times of high volatility in the markets.

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<v Speaker 1>And so years ago traders started using a stable coin

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<v Speaker 1>called tether to you know, exit positions and various coins

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<v Speaker 1>and go into Tether, which is pegged one to one

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<v Speaker 1>to use dollar at times of high volatility. More recently,

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<v Speaker 1>stable coins have and then the news for sort of

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<v Speaker 1>an unfortant reason because one stable coin called terror use

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<v Speaker 1>d collapsed and it basically led to the destruction of

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<v Speaker 1>more than forty billion dollars in market value. Okay, forty

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<v Speaker 1>billion dollars is a non trivial amount of money, and

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<v Speaker 1>I would love for you to explain a little bit

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<v Speaker 1>more first, how terror USD is different from something like

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<v Speaker 1>Tether and even more importantly, how it caused that value destruction,

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<v Speaker 1>So the name stable coin can be deceiving. They are

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<v Speaker 1>called stable coins because they're supposed to be relatively stable,

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<v Speaker 1>whereas a lot of other cryptocurrencies are wildly volatile sometimes,

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<v Speaker 1>and so each stable coin is supposed to be paid to, say,

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<v Speaker 1>one year's dollar. The problem is different types of stable

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<v Speaker 1>coins achieved this peg differently. So Tether, for instance, is

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<v Speaker 1>at least supposed to be backed by cash like assets.

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<v Speaker 1>And when we say backed by, what we mean is

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<v Speaker 1>if you were to peer into Tether's accounting books, for

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<v Speaker 1>every Tether in circulation, there should be an equivalent amount

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<v Speaker 1>of US treasuries or dollars or something else that they

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<v Speaker 1>could if they had to sell in order to make

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<v Speaker 1>somebody whole for the value of their thing, right, exactly right.

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<v Speaker 1>And then we have ter a U s D, which

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<v Speaker 1>did not work this way at all. So it's one

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<v Speaker 1>of the so called algorithmic stable coins that essentially use

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<v Speaker 1>algorithms and different trading incentives to maintain their one to

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<v Speaker 1>one peg. And according to one academic paper that I've

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<v Speaker 1>seen in recent days, it's an impossible task. Essentially, this

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<v Speaker 1>is kind of the conclusion right now, especially after terror

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<v Speaker 1>use d has failed. Essentially, the way Terra u s

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<v Speaker 1>D s PEG worked was it was pegged to another

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<v Speaker 1>coin called Luna, and essentially one terror use D was

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<v Speaker 1>always supposed to be equal to one dollar worth of Luna.

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<v Speaker 1>And this is how it functioned for a while, and

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<v Speaker 1>it worked until it didn't. And essentially what happened was

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<v Speaker 1>there was a bank run kind of an event, and

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<v Speaker 1>in this event, basically the most basic part about how

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<v Speaker 1>the stable coin function did not end up working. So technically,

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<v Speaker 1>when say terror use d dips below one dollar, you're

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<v Speaker 1>still supposed to be able to recoup one dollar worth

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<v Speaker 1>of Luna. What we've seen is sort of the price

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<v Speaker 1>of Luna started dropping, and so you needed more and

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<v Speaker 1>more Luna, So you needed more and more Luna to

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<v Speaker 1>buy one terror USD. That's right. And actually what we've

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<v Speaker 1>seen in a matter of days, both terror used D

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<v Speaker 1>and Lunar values dropped into sense and then below sense.

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<v Speaker 1>And that's how we've seen these billions of value destroyed. Basically,

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<v Speaker 1>this war pretty large cryptocurrencies by market cap, and this

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<v Speaker 1>market caps just evaporated in a matter of several days. Now,

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<v Speaker 1>you said, what we saw was kind of the equivalent

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<v Speaker 1>of a bank run. And when folks think about bank runs,

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<v Speaker 1>there's not sort of somebody comany with like stick them up,

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<v Speaker 1>put your cash on the thing. This is more about

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<v Speaker 1>a collapse of confidence, a disbelief that the bank can

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<v Speaker 1>if you were to go and say I would like

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<v Speaker 1>to withdraw the money from my savings, that the bank

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<v Speaker 1>would be able to give that money to you. And

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<v Speaker 1>so it sounds to me like what you're describing was

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<v Speaker 1>like a mass psychological effect of people who had previously

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<v Speaker 1>believed whatever terror USDs value proposition is suddenly all coming

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<v Speaker 1>to the conclusion that actually, there's nothing here that's right.

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<v Speaker 1>You know, if you look at the after bath, there

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<v Speaker 1>was nothing there. Because there were different ideas for how

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<v Speaker 1>this stable coin could be billed out, how the situation

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<v Speaker 1>could have been made better, but none of it ultimately

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<v Speaker 1>came too much. And so right now the community behind

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<v Speaker 1>terry Ust is trying to rebuild, and there is a

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<v Speaker 1>new blockchain that's been kind of rebuilt. But ultimately what

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<v Speaker 1>we've seen is people lost confidence in the project and

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<v Speaker 1>in this cryptocurrencies, and ultimately they were completely decimated within

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<v Speaker 1>several days. They didn't only lose confidence though they lost money. Yeah, right,

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<v Speaker 1>like we've you know, we've been reporting, others have been reporting.

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<v Speaker 1>There were some nice pieces in addition to hours in

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<v Speaker 1>the Wall Street Journal and in rest of the world

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<v Speaker 1>about how people all were the world who had thought, oh,

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<v Speaker 1>this thing seems stable. It's got stable in the name,

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<v Speaker 1>I'm going to put some significant amount of my earnings

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<v Speaker 1>or my savings into this. In practice, though, I think

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<v Speaker 1>sometimes it's hard for people to be like, but I

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<v Speaker 1>don't understand how you lose money on crypto, Like how

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<v Speaker 1>does that work practically? So I think that's a great

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<v Speaker 1>point in a sense of you know, sometimes we forget

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<v Speaker 1>that some portion of people who invest in crypto their speculators.

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<v Speaker 1>They're investing money that is extra that they don't necessarily

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<v Speaker 1>need for day to day. And then we have a

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<v Speaker 1>lot of people who, perhaps especially from developing countries, are

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<v Speaker 1>investing in crypto because perhaps their own currency is very volatile.

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<v Speaker 1>There is so much distress from people who lost money here,

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<v Speaker 1>and some of the ways it seems to me that

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<v Speaker 1>they lost money is you know, baked into this expectation

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<v Speaker 1>was not just if I spend one dollar, I'll have

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<v Speaker 1>one dollar of Terra USD. But the reason that people

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<v Speaker 1>were doing that, the reason people were investing in this

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<v Speaker 1>wasn't only for the stability, which was important. It's because

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<v Speaker 1>they were getting pretty high interest rates, right. Like A

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<v Speaker 1>big value proposition of this whole ecosystem was if you

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<v Speaker 1>quote unquote save your terror or your Luna on certain

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<v Speaker 1>parts of you know, the crypto ecosystem, you would get

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<v Speaker 1>the equivalent of returns that there's no way to generate

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<v Speaker 1>that on a traditional bank account. So people were arbitraging

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<v Speaker 1>the fact that, you know, if you have a savings account,

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<v Speaker 1>you might get one percent interest on whatever you have

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<v Speaker 1>in there, but if you had Terra USD, you were

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<v Speaker 1>getting up to twenty percent of what you had in there. Right.

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<v Speaker 1>So basically, if you had Terry us D, you could

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<v Speaker 1>invest it into ink or protocol on the Terra blockchain

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<v Speaker 1>and get this crazy up to returns. And I think

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<v Speaker 1>that's one of the maybe lessons here is that there

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<v Speaker 1>are a lot of crypto projects that seemed too good

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<v Speaker 1>to be true and if they seem to answer they

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<v Speaker 1>are too good to be true. Yes, definitely. Now there's

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<v Speaker 1>many parts of finance that have over the decades offered

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<v Speaker 1>shall we say above average guilds. That has generally ended

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<v Speaker 1>poorly for all involved. But it does feel like this

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<v Speaker 1>collapse had a more significantly retail effect than institutional that

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<v Speaker 1>the people who were really hurt here were the folks

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<v Speaker 1>in places like Argentina or Brazil who were trying to,

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<v Speaker 1>you know, get either a little bit more stability than

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<v Speaker 1>was offered by their local currency or tap into that yield.

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<v Speaker 1>Have we seen additional regulatory context or questions about any

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<v Speaker 1>of this in light of the effects on that retail

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<v Speaker 1>investor base. Absolutely, and I think that's the big sort

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<v Speaker 1>of effect that chair will have perhaps historically on the

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<v Speaker 1>crypto space. Pretty much all regulators that look at the

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<v Speaker 1>space in the US have commented on what happened with

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<v Speaker 1>Terry U, S d SEC, et cetera. Jennet Tellen talked

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<v Speaker 1>about it. The use of digital assets is rising very rapidly.

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<v Speaker 1>They present the same kinds of risks, of run risks

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<v Speaker 1>and other risks, aiment system risks, and really we need

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<v Speaker 1>a comprehensive framework so that there are no gaps in

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<v Speaker 1>the regulation. And so I think the result of this

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<v Speaker 1>collapse will be perhaps more urgent development of regulation of

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<v Speaker 1>this space. I think it's it's going to be a

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<v Speaker 1>good thing because for several years now a lot of

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<v Speaker 1>people and institutional investors have stayed away from Defy because

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<v Speaker 1>it's so unregulated the wild West of crypto. Perhaps as

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<v Speaker 1>more regulation trickles in, there will be big changes in

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<v Speaker 1>how Defy functions, but there will perhaps be also more

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<v Speaker 1>capital flowing into it and more investors, serious investors giving

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<v Speaker 1>it the shot. And when we talk about Defy, you

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<v Speaker 1>know you mentioned Anchor protocol earlier. What we're talking about

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<v Speaker 1>is the ways in which crypto and people who believe

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<v Speaker 1>in crypto are trying to rebuild more traditional financial services

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<v Speaker 1>and offer things like lending or like interest or yield

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<v Speaker 1>bearing products. Is that right? Right? So in theory, at

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<v Speaker 1>least this could lead to additional efficiencies, but in practice

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<v Speaker 1>what we have with Defy, at least in its present state,

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<v Speaker 1>is people losing money, either because these projects got hacked,

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<v Speaker 1>which we'll talk about more in future episodes, or because

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<v Speaker 1>the projects itself just collapsed into nothingness. Absolutely, there are

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<v Speaker 1>still it's it's such a very very risky space. I mean,

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<v Speaker 1>all crypto is is i would say, very risky, and

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<v Speaker 1>in this very risky space, Defy is the riskiest fire.

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<v Speaker 1>Beware as they say, all right, well, Olga, thank you.

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<v Speaker 1>I really appreciate you joining us to be our first

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<v Speaker 1>guest on this podcast and helping the world understand algorithmic

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<v Speaker 1>table coins just a little bit better. Thank you. You'll

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<v Speaker 1>find more of Olga Curiefs reporting on the Bloomberg terminal,

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<v Speaker 1>on Bloomberg dot com and on Twitter. She's Olga Karif

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<v Speaker 1>that's k H A R I F on the next

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<v Speaker 1>episode of Bloomberg Crypto. Cryptocurrencies are increasingly popular as investments.

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<v Speaker 1>Everyone from traders on Reddit to big institutional shops seem

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<v Speaker 1>to have some kind of crypto strategy. But what happens

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<v Speaker 1>when the people investing in this asset class are also

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<v Speaker 1>the ones in charge of regulating it? What are the

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<v Speaker 1>ethical implications of having members of Congress by bitcoin? Tomorrow

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<v Speaker 1>a chat with Bloomberg report to Akela Gardner about how

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<v Speaker 1>to regulate the crypto regulators. I'm Stacy Marie Ishmael, and

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<v Speaker 1>this is Bloomberg Crypto, a daily podcast from Bloomberg and

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<v Speaker 1>I Heart Radio. For more shows from I heart Radio,

0:16:17.080 --> 0:16:20.360
<v Speaker 1>visit the i heart Radio app, Apple Podcasts, or wherever

0:16:20.400 --> 0:16:24.440
<v Speaker 1>you get your podcasts. Email your comments, questions or suggestions

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<v Speaker 1>to Crypto at bloomberg dot net. Follow us on Twitter

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<v Speaker 1>at Crypto. The producer and editor of this episode is

0:16:32.120 --> 0:16:37.200
<v Speaker 1>Vicky Verglina. Our engineer is Blake Maples. Original music by

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<v Speaker 1>Leo Sidran. Bloomberg's head of Podcasts is Francesco Levi