Most people are exhausted with the crypto crab market we’ve been in for months now. Those of us who were around for the last bear know things could be a whole lot worse than they are right now. I’ve never been mentally ill enough to trade the 1-minute candles but I’m sure those of you who are haven’t had much fun in 2022. CT is becoming increasingly cranky with every successive fake breakout, and I get the feeling latecomers to this bull run have either a) capitulated & left already or b) are blindly throwing shit at the wall hoping something sticks. My personal opinion is that existing narratives are out of steam (duh), and until we see some of the below, we’re probably stuck in this sideways chop.
One other catalyst that could breathe some new life into crypto is the emergence of a novel new primitive. I’ll come back to what this might mean a bit later but let’s take a quick look at what’s going on & if we should care…
Algo-stables
Everyone is familiar with algorithmic stablecoins at this point, & for those of you who don’t know how they work mechanically, I urge you to go learn & understand that ASAP. One of the largest benefits to algo-stables is they are infinitely more capital efficient than collateralized ones & thus can scale far quicker. Just look at UST’s market cap growth.
The problem we’ve seen in the past with algo-stables is obviously losing their peg. Now that hasn’t happened with UST and I’m not suggesting it will, but I would caution against those who don’t even go through the exercise of understanding HOW it could happen. Do Kwon is an incredible builder in this space & executes like very few can, but if your current bull thesis on Terra/Luna is that Do will figure it out I think you’re being a bit too flippant. So, what’s the hypothetical that causes UST to de-peg?
- Volatility in a bear market
- Significant reduction in demand for UST
The first of these issues is not super interesting to me and mostly self-explanatory. If crypto markets nuke and LUNA falls 50%, there’s going to be concerns that there isn’t sufficient collateral/value to cover the supply of UST out in the market & you get a rush for the exits. That’s straightforward.
The second of these is more interesting & fundamental to understanding what’s been driving this UST demand growth. Simply put, Anchor’s role cannot be separated from UST when it comes to demand. Anchor’s been around a while but has come into focus more recently as DeFi yields contracted & suddenly 20% seems pretty good. The Anchor team (& Luna Foundation) recognized this pattern shift and to-date have been happy to keep topping up rewards so that Anchor can continue to offer this attractive yield. So long as the Terra team feels this marketing spend is worth it to bring people into the ecosystem it will continue to pay an attractive yield. The problem arises when other chains recognize this has been an effective strategy & begin to offer their own version but with better yields. Small tweaks to the design (or a fork) with higher yields all of a sudden make Anchor much less attractive & as a result the demand for UST shrinks. This is where things become dangerous because it is the beginning of what many call a “death spiral”:
- UST is burned at-scale because users are moving to the higher-yielding forks on other chains
- UST being burned to mint more LUNA leads to massive LUNA inflationary pressure
- There’s a multiplier effect such that 1 billion UST burned is not going to lead to just a 1 billion dollar decrease in LUNA’s market cap – that decrease is likely to be orders of magnitude larger
We’re already seeing the signs of alternative chains taking a page out of LUNA’s playbook. NEAR announced its own stablecoin, USN, albeit with a slightly different design, and much to the delight of Do a less juicy 10% yield. Sidenote: this feels like a bit of a missed opportunity for NEAR. Even if they are trying to be prudent I can’t help but think offering a juicier yield at least initially would have led to more users pivoting over and a higher percentage of them sticking around after the yield is reduced. Just a thought. The other newest entrant to this arena is Emperor Justin Sun & Tron’s USDD which will launch May 5th & carry a 30% APY (full whitepaper here).
I’m not trying to fud any of these chains or stables, I’m just articulating non-zero chance events. I happen to own all of these tokens myself (except Tron lol) but I’m not blind to the risks. Something that Haseeb Qureshi mentioned on a recent pod is important to recognize: these algo-stables need to get exogenous uses, otherwise they break.
I’m hopeful they do because I think having truly decentralized stables is important for the long-term health of crypto. I would continue to pay attention to what’s going on with algo-stables because I think it’s easily one of the most interesting spaces at the moment.
Macro
Not a lot of interesting stuff going on here to be honest. The Russia/Ukraine conflict still rages even if the West has moved on to the next thing, which we have & which is sad. All eyes are on inflation prints & the Fed. I tend to agree with AltcoinPsycho that the Fed signaling a 75bp hike is mostly pysops. Prep the market for 75bps, then hike 50bps and hope the reaction is positive. At some point people will catch on to this and won’t be fooled but for now it seems like they’ll try to play that card again. Volatility in tradfi has started to rear its head a bit again (VIX at 30 as I type) but I think there’s plenty of room for more vol.
One last point on inflation that’s tied to the previous algo-stable discussion: are “inflation-resistant” stablecoins solving a real problem?
I’ll admit the idea sounds good in theory – “your regular stables are being inflated away just as much as fiat!”, “we can programmatically account for inflation!”, “maintain your purchasing power anon!” But the reason stablecoins were the first killer app for crypto is because they acted as the lubricant to markets & the exchange of money. So much new capital came into the space thanks to stables & their use-cases. The dollar is still the worlds reserve currency, not the inflation-adjusted dollar. For everyone hoping we’re still so early, I think it’s incompatible to think adoption ramps up through the introduction of an inflation-resistant stablecoin. By the same measure, I don’t think the use-cases of existing stables (25% of the top 20 token market cap btw) has much to do at all with protecting against periods of elevated inflation. While yields are lower than they were a year ago in DeFi, nobody outside of DegenSpartan is getting excited about single-digit APYs. At least today my view would be these can serve a purpose similar to TIPS (Treasury Inflation-Protected Securities) but I’m not so sure they are anything more than a niche, albeit interesting lego block.
New Primitives
I mentioned this at the top as a possible catalyst for a narrative shift in crypto. By definition novel new primitives are difficult to identify ahead of time. Protocol-owned liquidity likely extended the bull market last summer into the fall (along with NFTs) but I haven’t seen anything yet that could have a similar impact. I don’t think it’s inflation-resistant stables. I’m skeptical that NFT collateralized lending will be it. With the Optimism airdrop announcement, maybe we start to see the L2 narrative develop again but I suspect that’s further down the road. The bridge wars will be fascinating to watch play out and maybe the answer lies somewhere in that arena. Would be curious to hear what others think could become this catalyst…
Wholesome Conclusion
When I was little my parents used to ask me every so often “what do you want to be when you grow up?” I was always into sports, so my answer was some variation of pro baseball/football/basketball player depending on the time of year.
As I got into middle school & high school, they started reframing the question as, “let’s say you don’t end up getting drafted & playing pro ball, what would you want to become then…as a back-up plan?” For whatever reason I remember always defaulting to some type of surgeon (lol), probably because I heard someone’s parent say they make a lot of money. Sadly, middle school me was a slave to the almighty dollar.
When I got into college, they would ask “so what do you want to do when you graduate? You like working with numbers and you’re good at it, maybe you should work in finance”. I mostly tripped into my early career in tradfi and never really explored other options.
I feel very fortunate now to have stumbled upon crypto back in 2015 because in an alternate universe maybe I never do, and I’m just another paper-pushing 9-5’er who thinks crypto is a scam. I bring this up because a lot of times today you’ll hear phrases like “on average”, “in general”, “over time the data says” and these are both accurate but also misleading in some cases. You only live one life, and you don’t get to run your life like a Monte Carlo simulation. You don’t get to run 10,000 simulations and live the “average” outcome of those 10,000 runs. For those of you who are genuinely passionate about crypto, these past few months have been painful I’m sure, but they will pass. I would encourage you to continue learning, continue experimenting & continue to build your skillset. Many of the huge success stories you know of today were cultivated during the previous bear market days. The tourists will continue to show up when things are great and run for the doors when things turn sour. This is to be expected. For those of us passionate about what’s actually going on & being built (as opposed to fixated on prices going up), it is a long, but I believe worthwhile road ahead.
thanks for reading! if you want to hear more from me, follow me at 0xsmac on twitter. dm’s always open.