This week: as cryptocurrencies plummet, some stablecoins are not so stable.
Sandra Peter (Sydney Business Insights) and Kai Riemer (Digital Futures Research Group) meet once a week to put their own spin on news that is impacting the future of business in The Future, This Week.
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The stories this week
05:48 – Is it the end of algorithmic stable coins?
Other stories we bring up
What’s up with the US baby formula shortage
What’s behind the US baby formula shortage?
The iPod is dead, but the podcast lives on
Baidu and Pony.ai become first robotaxi services to operate without safety drivers in Beijing
$7.6bn of ‘stablecoin’ tether redeemed since start of crypto crisis
Crashing crypto, marketing and attracting investors
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Music by Cinephonix.
Disclaimer We'd like to advise that the following program may contain real news, occasional philosophy and ideas that may offend some listeners.
Sandra This week in crashing crypto: stablecoins. Cryptocurrencies have always been volatile, but in the midst of the carnage of the last week or so there was one category that was meant to save us all. Stablecoins.
Kai Not so stable.
Sandra We need to talk about this.
Intro From The University of Sydney Business School, this is Sydney Business Insights, an initiative that explores the future of business. And you're listening to The Future, This Week, where Sandra Peter and Kai Riemer sit down every week to rethink trends in technology and business.
Kai We do.
Sandra I feel we have to talk about the stock market crash, the crypto crash and the...
Kai Not-so-stable coins.
Sandra Even though there were quite a few other interesting stories this week.
Kai Turns out after all the shortages, chips and nickel, neon, sand, baby formula is also running out, and this is out of the US.
Sandra And this is interesting because we both assumed yeah, it's just another one of those disrupted supply chains, shipping crisis...
Kai Container's stuck, yeah.
Sandra Container's stuck, and then it seemed to be just one of those oh, one of the plants got contaminated. And then we've looked, well, half of the supply is gone almost in the US, what's going on here?
Kai Well turns out baby formula is one of those product categories that are essential to everyday life for a lot of people, but economically does not attract much attention from producers. It's not something that people invest in.
Sandra Yeah, it's literally a shrinking market. Because turns out, megatrends.
Kai Demographic shift. People are growing older, not enough babies are being born, market is shrinking.
Sandra So in the West, we've got an ageing population, we have fewer and fewer children. Hence, the market for baby formula has been shrinking now for decades, which means that the only way to really make more money in the market...
Kai Is size, you merge. But now there's only three left in the US and one goes temporarily out of business. But the remaining two also have very little incentive to now ramp up production because it's still a shrinking market.
Sandra Or they cut costs, which is incidentally, why we probably got the contamination problems.
Kai Yeah, that's what basically the article said, is that that's what led to the contamination. And because it's a shrinking market, there's also very little incentive to innovate. It's not a market that attracts a lot of startup companies.
Sandra Interestingly, there is a part of the world that is still growing, and that is Asia Pacific, which is becoming the largest market for baby formula in the world. So if you look outside of Western economies, and outside of the US where this crisis is happening, it might also be one of the few places where we'll see some innovation. We're seeing, you know, innovation in New Zealand, Karicare Toddler making stuff with pure New Zealand sheep's milk.
Kai Of course they are. And we in Australia have had our experience with the growing Asian market. Because Asia wasn't producing enough of their own baby formula, there have been shortages in the last few years in Australia on and off because people would export baby formula to places in Asia. But for the US, at the moment, it means that there are material effects on everyday life. People are organising on social media, they're sharing baby formula, they're trying to help each other. But it is very hard to convince manufacturers to actually invest in this market and avert crises like this.
Sandra Speaking of investing in markets, we have to mention the one that has completely disappeared. As of this week, Apple finally discontinued the last iPod model this week. The pod lives on in podcasts like The Future, This Week, and The Unlearn Project. But the iPod is now really truly gone.
Kai Do you mean those devices that are just like phones just without the phone? Yes, they're gone. Because, you know, not much of a market for it. I do own an iPod classic, though.
Sandra But there was another story I was gonna mention this week, and that's around robotaxis without safety drivers. They've now come to China as well. Baidu and Pony.ai become the first robotaxi services to drive around without safety drivers in Beijing.
Kai So do they still have a steering wheel, but no one's sitting in the driver's seat? How's this work?
Sandra Well, they no longer need to have anyone in the driver's seat. Both companies still need to have someone present somewhere in the vehicle, which makes you think where is somewhere?
Kai Yeah, yeah. And what are they doing? They're just there? For what purpose? Maybe for the company to literally have skin in the game.
Sandra And this is important because Pony.ai, which is backed by Toyota, is now the first autonomous car company to have a taxi licence in China. And that's for 100 cars at the moment, and we hope they do better than autonomous cars in California where their licence was suspended after they collided with I think it was like a central divider on the road.
Kai Yeah, so the quest to build fully self-driving cars that can navigate the tricky messy world of inner-city driving is still ongoing. And that's the next attempt to make it work.
Sandra So now the race is on with Pony.ai and Baidu and Waymo and Cruise, all with some skin in the game.
Kai Yeah. Speaking of skin in the game, this is the week of crypto reckoning, it's been called the crypto crashes and crypto has been all over the news. Crypto seems to be competing with tech stocks for who can post the biggest loss in a week.
Sandra But there was one standout in the crypto world right because cryptocurrencies have always been super volatile.
Kai It's a hallmark, right? And that's the whole point of HODL. You should hold your coins even in the face of you know, the prices halving, and in the past that has actually worked out for those who got into
Sandra The ones that hold on for dear life.
Kai Yeah. It's just a spelling mistake. But yes. And people in the crypto market have always weathered these downturns and it might well turn out that this is just another one of those.
Sandra There was a standout. There was one category of coins that was always designed to kind of have a constant value and provide some sanity in the midst of all the craziness around crypto, and that's been stable coins.
Kai Yes, stablecoins are supposed to be stable. They're supposed to be the place in the crypto world where you can flee that volatility, the 10% up and down per day that many of the coins are experiencing at the moment, including big ones like Ethereum and Bitcoin.
Sandra So we thought we'd have a bit of a closer look at stable coins this week. What are they? What the hell happened? And what now?
Kai So first of all, what are stablecoins?
Sandra Stablecoins really are another type of cryptocurrency which tries to hold a steady exchange rate with a fiat currency for example, with the US dollar. So one stablecoin always gets you one US dollar.
Kai That's the point here. But then you might ask, okay, I've heard crypto is all about, you know, rising crypto prices, everyone is excited because there's only a limited amount of Bitcoin that can ever be minted, and more and more people will come in, so it's deemed to drive prices up. Why would I have a coin that is essentially not doing anything?
Sandra Well, the idea is exactly what you said. Bitcoin fluctuates a lot. And we've seen, you know, wild ups and downs, it's even lost, you know, 20% of its value in one day. At some point, the fluctuations are quite wild. And there's a lot of volatility in the market. And the idea would be to have a coin which helps you hedge against the spikes in Bitcoin's price or help you just store cash without transferring it back to a fiat currency. If you're trading in crypto getting in and out of the market is quite expensive. So in between things you might want to park your cryptocurrency.
Kai Yeah, so funnily enough, stablecoins seem to fix a couple of major shortcomings in things like Bitcoin. Bitcoin, remind you, was originally invented to be an online payment system. But it turns out that the transaction costs are very high because the blockchain is not very efficient. It also takes a lot of energy to transact, and it fluctuates wildly, so it's not really very good as a stable store of value or a payment system. And so stablecoins are a way to get out of Bitcoin, but not having to convert it back to US dollars where you know, you incur these transaction costs, or to just make payments where you can be sure that when you buy it today, and you transact three days later, you're not left with you know, 30% less of the money.
Sandra And I think it's important to know that stablecoins really have grown in popularity over the last few weeks. The largest stablecoin, Tether, which is also like the third biggest cryptocurrency, Tether has a market cap of around $80 billion.
Kai So $80 billion parked in Tether basically at any one time. But the question then arises, how do you actually stabilise the coin because, you know, most cryptos fluctuate widely with you know, demand and supply. And the crux here is really how do stable coins get stabilised?
Sandra Well, we mentioned Tether. And there are a number of these kinds of stablecoins like Tether and USD Coin and Binance USD, which are reserve-backed, which is what you would expect. That is to say, theoretically, they have enough US dollars so that when you want your Tethers exchanged for US dollar, I can give you one to one, the fiat currency in their place.
Kai There's a little caveat to that, that these companies or consortia that have created these stablecoins are not really required by law to you know, transparently show that they have that amount of dollars, and they don't necessarily have dollars, but they can have bonds or other kinds of cash reserves. But the idea here is that these coins are backed, there is enough reserve that should there be a run on these coins, should a good part of these 80 billion be converted into US dollars, there is enough there to make sure that the price doesn't crash.
Sandra And there was a run on these stablecoins, right. In Tether alone, investors wanted about seven and a half billion dollars back since the crisis started last week alone, which meant that a huge sum of money had to be paid out. In this case Tether was, Tether did experience a short-lived crisis where the value did drop to 95 cents to the dollar. That means that if you tried to recoup your money, you will only get 95 cents for the dollar,
Kai Which isn't great, but...
Sandra But it wasn't as disastrous as many of the other stablecoins, and we'll get to them in a minute. Tether did survive and recoup its value. But that's not what happened to many of the other stablecoins.
Kai Most notably TerraUSD.
Sandra And TerraUSD is another type of stablecoin. It's not an asset-backed stablecoin, it's an algorithmic stablecoin. This means that it does not have reserves, whatever those reserves might be, as we said, there's no regulation in the space, but it doesn't have reserves. Instead, it's kind of meant to function through a complex algorithmic mechanism that will somehow hold the coin up and ensure that TerraUSD has a one-to-one parity with the fiat currency, in this case, the US dollar. And there's many ways to do these algorithmic backings. In the case of TerraUSD, it was linked to another crypto called LUNA.
Kai Actually Terra LUNA, but LUNA for short. The point here is that those two cryptocurrencies would function in conjunction with each other, where trading in one will stabilise the other coin.
Sandra But before we explain how this actually works, let's make it clear that the fall for LUNA and for TerraUSD was much more severe than 95 cents to the dollar. LUNA now trades at 0.00014 cents from a high of like $120 I think it was. And in the meantime, for TerraUSD...
Kai Which was meant to stay stable at exactly $1 which was the point of the stablecoin.
Sandra You can now get exactly one cent for it.
Kai Which has been in freefall for a number of days and is essentially worthless by now.
Sandra So how does this algorithmic pegging work? How do you ensure the value of a cryptocurrency by in this case linking it algorithmically to another currency?
Kai So in short, and without going into the detail, TerraUSD, the stablecoin was linked to another coin, LUNA. And whenever TerraUSD would deviate from the $1, up, or down, there would be an incentive for so-called arbitragers to make money by exchanging the two. So as long as people kept trading between the two and making profits from the exchange, it would algorithmically stabilise the stablecoin. But that means that it has to rely on people constantly believing that this system works and actually engaging in those exchanges and trying to make money from it to stabilise the coin.
Kai But the idea here is that this only works as long as there is a demand or people willing to do this arbitrage. Otherwise you can have all the incentives in the world, but people are not trading.
Kai And rely on the fact that there is enough people there to trade that when a run happens and people want to get out of the stablecoin, it can still be stabilised. This system broke down when the crypto market started crashing and people started pulling their money out of stablecoins. When this arbitrage mechanism couldn't match the amount of money being pulled out, LUNA started crashing, basically taking away the incentive for engaging in the trade, bringing down both coins at the same time.
Sandra And remember, this is coming in the midst of a huge downturn overall in the crypto markets, right, all the cryptocurrencies lost a lot of value. But this led, in the case of Terra for the price to crash initially as low, low as 30 cents to the dollar. And as we said now...
Kai It's one cent to the dollar, which essentially means that this system has now crashed. And there were actually warning signs early on, people wrote memos and white papers saying that should this well-honed system of two crypto currencies with constant trading with arbitrageurs, should that ever fail and break down the whole system would come crumbling down. And it's essentially a little bit like the movie Speed. Remember the movie with...
Sandra Is that the Sandra Bullock thing?
Kai Sandra Bullock and a bus. The bus has to keep running. If the bus falls under a certain speed
Sandra It blows up.
Kai It blows up. Same here, if the activity falls below a certain level, not enough people trading and believing in the arbitrage system, there is really nothing to stop it. And it will lead to an unravelling and basically a crash that can't be stopped. Because after all, there is no backing with US dollars with actual assets in the background.
Sandra So the question is where to from here? What are lessons learned? What's next? So thinking about the future, what can we learn from the stablecoins debacle?
Kai Well, in this particular case, interestingly, a lot of companies that initially back the system when early warning signs came up and white papers, people divested and took their money. So a number of institutional investors and venture capitalists have made quite a bit of money apparently, off Terra and LUNA, getting out of it. While a lot of people who got in late, retail investors, got severely hurt to the extent that it's always been said that, you know, with cryptocurrencies, you have to be prepared to lose all your money. This has actually happened now with this particular coin, especially LUNA.
Sandra And it must be said that this likely has hurt a lot of those retail investors, because in the past year or so, crypto in general has used a lot of celebrities for marketing. It's not only the likes of Elon Musk, you know, talking about Dogecoin, but it's been people like Kim Kardashian or Matt Damon, or even people like Mike Tyson, political figures. Ahh, I think it was the mayor of New York and some Republican senators who were saying, 'Well, this is the thing to be investing in'. So it's likely that some of these people did get hurt. And for them, the economic pain comes on top of rising inflation, rising interest rates, rising cost of living.
Kai Which might have implications for the crypto market more broadly. In the last few waves crypto has always regained losses and then grown tenfold because it was able to grow the market and entice more and more people into it. So there's no question marks
Sandra Have we run out of people?
Kai Have we run out of people? Paul Krugman in New York Times asks, is this particular downturn different? Because we might not be able to entice another big group of investors into the market. But it also raises questions for regulation. So as a reminder, there's cryptocurrencies like Bitcoin, they're stablecoins that are backed. And then there's a whole bunch of innovations in this market that tried to use complex algorithms to create new forms of decentralised finance, DeFi. And these algorithmically pegged stablecoins were one particular one where there's now a big question mark as to the sustainability of some of these new models.
Sandra There might be renewed interest in regulation not only of stablecoins, but maybe crypto in general, probably the collapse of stablecoins, like TerraUSD is raising alarm bells with regulators, not only because of the huge potential losses and financial consequences of investing in these markets, but also because increasingly retirement funds are allowing, for instance in the US, employers to invest in things like Bitcoin that lost 20% in one day. Certain cities have invested now in their own cryptocurrencies which have lost over the last week, basically 90% of their value and for currencies like the NewYorkCityCoin. And because even in the case of currencies like Tether, which is asset-backed, there is still no regulation to say how much liquidity they have to have what type of cash like assets do they need to hold whether that's you know, corporate bonds or government that are actually cash. We don't know in the case of Tether, it just says it's backed 100% by Tether's reserves, which could basically mean anything.
Kai But there's also the bigger picture. And while critics might call this, you know, a moment of reckoning and the unravelling of the idea of cryptocurrencies, it is more likely to be an opportunity now, to take a good hard look at the various models that are emerging, those innovations that are emerging in more detail and bring some form of regulation and oversight in because it might well be that Terra LUNA got unravelled because there was a particular flaw in its design. It doesn't mean that the idea of algorithmically pegged or stabilised stablecoins is dead per se. It also doesn't mean that many of the innovations in decentralised finance or what we now call web three are necessarily doomed to fail. But it is a moment now where the crash of Terra LUNA asked questions about which particular models are actually sustainable in the long run.
Sandra And as far as TerraUSD and LUNA goes, the very charismatic South Korean founder of the Terra project, Do Kwon says he's gonna basically relaunch the currency
Kai With an interesting move.
Sandra With an interesting move that's going to see him wipe all ownership of LUNA and redistribute a billion new tokens, most of them going to the people who owned the stablecoin, or who held LUNA before the disaster of last week.
Kai Which sounds a lot like communist land reform, which is an odd move for one of the most capitalist financial vehicles ever invented.
Sandra I think it sounds a bit more like Speed 2: Cruise Control, which got 3.9 on IMDb.
Kai A really bad movie, which means he might have a hard time convincing the audience to go back to Terra LUNA.
Sandra That's all we have time for today. None of this is financial advice of any sort.
Kai And Sandra and I will now go and take a look at our small crypto wallets and shed a tear.
Sandra Thanks for listening.
Kai Thanks for listening.
Outro You've been listening to The Future, This Week from The University of Sydney Business School. Sandra Peter is the Director of Sydney Business Insights, and Kai Riemer is Professor of Information Technology and Organisation. Connect with us on LinkedIn, Twitter, and WeChat. And follow, like, or leave us a rating wherever you get your podcasts. If you have any weird or wonderful topics for us to discuss, send them to firstname.lastname@example.org.
Kai Yeah. That sums it up!
Sandra Cryptocurrencies. Yeah.