Stablecoins: The good, the bad and the ugly

We did our due diligence and had no exposure to collapsed stablecoin TerraUSD: OVEX CEO.
Image: Angel Garcia/Bloomberg

One of the hazards of being in the crypto market is that any calamity is immediately generalised. When stablecoin TerraUSD (UST) de-pegged from the US dollar in May, it brought bitcoin (BTC), ether (ETH) and thousands of other cryptocurrencies down with it.

It was a collapse that will surely go down as a milestone in the history of crypto. Regulators see this as an opportunity to step into the fray and lay down ground rules for cryptos. Traditional asset managers with little love for cryptos see this as an affirmation of their long-held distrust for this new asset class.

The collapse of UST – an experimental ‘algorithmic’ stablecoin that was not fully backed by US dollars – and its sister coin LUNA will be analysed and discussed for years. LUNA went down in a ball of flames in May, from a market cap of $40 billion to less than $1 billion in a matter of days. UST de-pegged from the US dollar and crashed below $0.01 in a few days.

“These are the growing pains of a new asset class,” says Jon Ovadia, CEO of crypto platform OVEX. “Unfortunately, a lot of people assume all stablecoins are likewise at risk, which they are not.”

There is a vast difference between fiat-backed stablecoins such as Tether (USDT), True USD (TUSD) and USD Coin (USDC), all of which are fully backed by liquid assets such as US dollars, and algorithmic stablecoins such as TerraUSD (which are not fully backed by US dollars and rely instead on algorithms to maintain a 1:1 peg to the dollar). Stablecoins have a bright future in the crypto space, but these will have to be fully collateralised and audited.

Ovadia says OVEX had no exposure to either UST or LUNA on its own balance sheet, although it did offer clients the opportunity to purchase LUNA by listing it on the OVEX platform as a speculative crypto asset.

He points out that it was available on hundreds of exchanges around the world, but just as the JSE lists stocks that lose investors’ money, the fact that a coin is listed on a crypto exchange does not mean it is endorsed by the exchange.

“Fortunately OVEX had no direct exposure to either $LUNA or $UST, although $LUNA is a listed asset on OVEX and we feel deeply for those who lost money in what was a promising protocol beyond its algorithmic stablecoin.

“We always strive to list assets on OVEX that have real promise and we undertake extensive due diligence before deciding to list a project. It is important to remember that picking the top is the job of traders, our users. We are platform builders. As builders we have always put our users first. This is one of the reasons we charge ZERO trading fees and boast the tightest spreads. OVEX will continue to build a futureproof marketplace for the future of finance.”

When we asked Ovadia about the history of this now infamous project he said the following: “The reason Terra/LUNA grew so big was that it was offering 20% annual percentage yields, which is orders of magnitude higher than what you get in a traditional bank account. So it was understandable that people would chase these kinds of yields. We did our due diligence on Terra/LUNA and we saw it as a transparent Ponzi scheme. It wasn’t as if the creators were trying to fool people into an unsustainable money-making scheme – they were quite open and transparent about it.

“After speaking with Yearn Finance founder Andre Cronje, an advisor and shareholder of OVEX, we decided not to list UST given the many risks inherent in algorithmic stablecoins.”

Ovadia says some hard lessons are being learned as a result of the Terra/LUNA fallout.

“The first lesson is that not all stablecoins are created equal. We never offered our clients exposure to UST because we didn’t like what we saw.”

One of the outcomes of the Terra/LUNA debacle is that crypto exchanges are likely to find themselves under pressure to provide clients with a greater level of comfort in the form of proof-of-reserve audits.

“We do offer clients exposure to other stablecoins that are reliably backed by hard assets, such as Tether (USDT), Binance USD (BUSD), True USD (TUSD) and USD Coin (USDC). Our clients can purchase these ‘fully-fiat-collateralised’ stablecoins and earn annual percentage yields (APRs) of 10% to 14% and even higher in some cases,” says Ovadia.

In fact these stablecoins are increasingly sought after on OVEX, where they are put to work in OVEX’s Crypto Interest Accounts. These generate returns unheard of in traditional finance. They also offer investors sanctity from the current market rout. What is more – their high yields prevent the wealth deterioration as a result of unprecedented inflation in a pandemic-era economy.

Source: OVEX

“The collapse of Terra/LUNA has had a negative effect on cryptos generally, but I can see some good coming out of this,” says Ovadia.

“For a start, many of the less viable crypto projects are going to get weeded out, and that is a good thing. Secondly, I see a great deal more due diligence being undertaken by clients, particularly institutional clients, and stablecoins are already under a ferocious amount of scrutiny.

“Remember, the reason you invest in a stablecoin such as USDT or TUSD is because they offer protection from the volatility of more speculative coins such as BTC and ETH. If a coin professes to be a stablecoin, then you want to make sure that it is backed by collateral and not some fancy algorithm that goes straight over your head.

“I believe we are going to see a lot of good come out of this situation. I think regulators are going to find themselves under pressure to provide some form of ground rules for this new asset class, and that is a good thing. Clients and investors are going to demand greater accountability and transparency from crypto developers, who can no longer hide behind the façade of an industry that is unregulated.”

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