🦄 Recap: DeFi Week of May 10
Hello Defiers! Happy weekend!
Well… that happened. Someday we’ll look back on this week, the week Terra pulled a Chernobyl and radiated a crypto market already reeling from its maddening correlation with the stock market and Federal Reserve interest rate policy. The bears were willing to pounce at the first spill of blood, and when LUNA cratered and UST slipped its peg the market’s ursine instincts took over and a $40B project was devoured in the blink of an eye.
When we do look back, it will be with wisdom and the distance of history. Lessons will be learned, and out of the ashes newness will rise. That’s the plan, right? In the meantime, what the hell happened?
Our team fanned out across the broken ground to find an answer and returned with a series of reports. Robin Schmidt asked what do you do when life gives you an onion and took a bit bite. “You chow down, and you do the work.” Robin and his video team in Amsterdam produced segments on LUNA and UST, and a broader piece on three causes of the crash.
Jason Levin wrote about the hubris of Do Kwon, Terra’s outspoken co-founder, and how his boldness morphed into what many called recklessness. Jason also reported on Terra’s efforts to salvage what it can from the fallen ecosystem. Owen Fernau covered the fallout in Washington, where Treasury Secretary Janet Yellen called for legislation to regulate stablecoins and reported on Kwon’s revival plan. Sam Haig and yyctrader provided market insights, including the impact on Ethereum Layer 1s, which have flared with so much promise DeFi but are falling victim to the bear market.
Looking beyond the market’s travails was a most welcome respite. Camila Russo spoke to Diego Fernandez, Buenos Aires’ innovation honcho, about the South American city’s push to implement crypto payments for municipal taxes. Sam Haig’s story on MakerDAO’s groundbreaking deal to use DAI to finance shipments of Aussie beef should not be lost in the shuffle. It’s a vivid example of how DeFi can provide valuable applications in the real world.
So take a breath, exhale, and enjoy…
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🎙 Buenos Aires City Innovation Chief Talks Crypto Tax Payments and How Web3 Will Revolutionize Democracy:
This week we speak to Diego Fernandez, the secretary of innovation and digital transformation for the city of Buenos Aires. Recently, news broke that Buenos Aires will be taking tax payments via crypto, an initiative that Diego helped shape. We talk about what this means for residents of the city and how it works in practice. Diego also addressed critics’ response to the measure, who questioned why Argentines would spend crypto instead of holding it as a store of value. Diego dives into the city’s broader plans with crypto, including how it wants to leverage the tools and data at its disposal to build a blockchain-based identity system.
Crypto and government have been somewhat at odds with each other. We discuss the tension of how governments, which are centralized entities by definition, can use decentralized technology. Diego outlines the long-term vision of how these two worlds can interact. The interview was recorded before Argentina’s central bank effectively banned banks from offering crypto in response to pressure from the IMF. While we did not discuss this issue, we did get into how a pro-crypto city can deal with a less friendly environment for the industry on a national level.
Terra Collapse: Do Kwon’s Rise and Fall
Terra Struggling to Stabilize Crisis as Investors Flee
In which Jason Levin chronicles an entrepreneur’s Icarus-like trajectory.
“I understand the last 72 hours have been extremely tough on all of you,” Do Kwon tweeted Wednesday morning. “Extremely tough” will be an understatement for users who trusted their savings on a stablecoin – emphasis on the word “stable” – to now own only a small fraction of their initial holdings. Rarely has such a high-flying crypto project fallen so far, so fast, even in this volatile asset class.
Investors woke Wednesday morning to see that Terra’s native token, LUNA, is trading at $1.55. That’s down 97.5% from its all-time high of $119.18. Moreover, UST, Terra’s flagship stablecoin, which slipped its peg on Monday, has continued its slide after briefly rebounding Tuesday, to touch as low as $0.29 in early trading New York time on Wednesday.
LUNA, which stormed out of nowhere last year to notch a $41B market value and foment an entire crypto ecosystem, is now worth $1.8B, according to CoinMarketCap. Even worse, Terra’s meltdown may have repercussions outside of its ecosystem, impacting the entire blockchain industry. UST’s faceplant has triggered a regulatory crackdown in Washington, and delivered a heavy blow to the credibility of algorithmic stablecoins.
While Do Kwon and his team are scrambling to shore up their stricken tokens, investors are bailing en masse. It’s hard to see how Terra and its system can recover. “I understand the last 72 hours have been extremely tough on all of you,” Do Kwon tweeted Wednesday morning. “Extremely tough” will be an understatement for users who trusted their savings on a stablecoin – emphasis on the word “stable” – to now own only a small fraction of their initial holdings. Rarely has such a high-flying crypto project fallen so far, so fast, even in this volatile asset class.
Terra Collapse: Regulatory Fallout
Terra Draws the Ire of Crypto Community as Regulators Circle
In which Owen Fernau looks ahead at the regulations to come.
If the crypto industry was looking to prove the merits of stablecoins, May 9 did it no favors. Janet Yellen, the U.S. secretary of the treasury, said new legislation to regulate stablecoins the day after the meltdown of UST, the algorithmic stablecoin supported by Terra.
“[Stablecoins] run risks which could threaten financial stability,” Yellen testified in a Senate Banking Committee hearing. “Risks associated with the payment system and its integrity, and risks associated with increased concentration if stablecoins are issued by firms that already have substantial market power.”
Terra certainly had market clout going into this week. Its flagship token, LUNA, boasted a $40B market capitalization in April. And Do Kwon, Terra’s leader and self-styled “Master of Stablecoin,” had emerged as a DeFi superstar as LUNA skyrocketed.
But Terra’s pledge to redeem 1 UST for $1 worth of LUNA was a thin reed to support such a weighty proposition. And when LUNA cratered amid the crypto selloff, well, all bets were off for UST and it slipped its peg by an astonishing 40% on Monday.
The Dotcom Crash Looms Large Again
Guest writer Alex Shipp finds an opportune time to address key takeaways from the past.
Thirteen years out from its conception, cryptocurrency stands in a peculiar place — several iterations of creativity and sophistication beyond its original form, and many more removed from its most valuable promise: a decentralized, permissionless online universe owned and governed by its users.
Not unlike the dotcom boom in the late ’90s, crypto has a lot going for it. DeFi, NFTs, and DAOs continue to inspire the imaginations of leading developer teams and enthusiastic communities alike. And the tap of innovation shows no signs of drying up: powerful and disruptive decentralized applications are rarely more than a year of development away. On the human side, technical know-how and efficient fundraising methods are well-established.
But there remains one major obstacle that separates development teams and their platforms from adoption: critical infrastructures like Ethereum and other Layer 1 blockchains to serve the computational demands of DeFi.
Crypto's Killer App Fuels the 'Passion Economy'
Guest writer Jake Fraser lays out the utility of NFTs for artists and entrepreneurs.
In January 2022, Prada, the Italian luxury fashion brand Prada and Adidas, the giant sportswear manufacturer, teamed up to create a groundbreaking NFT project. By bringing in credibility and authenticity, NFTs are poised to redefine collaborations and create a safe space where all the collaborators can equally benefit from the partnership.
This, combined with the inherent rarity of NFTs, could give rise to an era of meaningful collaborations where the contributions of each collaborator are recognized, stored, and accounted for on the blockchain.
They asked people to submit unique artwork and photographs and selected 3,000 of them. They were compiled and featured in digital artist Zach Lieberman’s larger NFT and went up for auction on SuperRare. About 80% of the proceeds from the auction went to a non-profit organization Slow Factory. This project shows how NFTs unite brands, artists, creators, and social organizations around the world.
Do Kwon Wants to Save Terra by Creating a New Chain With 1B of Tokens for LUNA and UST Holders: The Terra ecosystem’s notorious leader is trying to salvage the resources and talent left behind in the wreckage that is UST’s depegging.
Trader May Have Lost $9M in Exit from USDT Opportunistic bots may have made off with millions of dollars worth of profits after one trader hastily tried to exit an enormous USDT position.
Terra Network Shuts Down Again; Binance Delists LUNA and UST Pairs The Terra blockchain shut down for a second time on May 13 after its validators, users who tend its blockchain, pulled the plug.
Lido Increases Liquidity Incentives as stETH Trades at Discount to ETH UST’s collapse continues to reverberate around crypto markets.
Curve’s largest pool is out of whack — the stETH pool, which pairs ETH with stETH, a staking derivative of ETH, shows stETH trading at a 2% discount to ETH.
USDT Briefly Slips Below $1 Peg as Terra Contagion Spreads As Terra’s UST stablecoin continues to unravel, Tether, the crypto market’s largest stablecoin is also showing signs of stress.
Terra Temporarily Halts Blockchain To Prevent Governance Attack The Terra blockchain has resumed block production after being halted for around 2 hours.
📉 Alt Layer 1 Trade Unravels as Ethereum Killers Sink Below ETH The would-be Ethereum killers are getting killed. Fantom, Solana, Avalanche, Cardano… These Layer 1 networks are getting walloped.
👺 Shapeshifting Azuki Founder Outfoxes Himself with Strange Confession “I fucked up,” said Azuki founder @Zagabond. The market agreed. On Monday, Azuki, an Anime-themed NFT collection of avatars, was at 23 ETH, ($58,558). Now it sits at a floor of 8 ETH, a 68% fall.
📉 Terra’s LUNA Crashes 95% As Investors Mull Recovery Plan Yesterday was a bad day for the Terra ecosystem. Today is worse. Heavy selling ensued as LUNA crashed 97% to a low of $0.69 before bouncing to $2.50 in midday trading New York time.
💰 Coinbase Will Keep Customer Balances in Event of Bankruptcy Coinbase will take your coins if it goes bankrupt. That was the rather jarring message in the first quarter earnings release for the leading U.S.-based centralized exchange.
🐄 MakerDAO’s Real World Push Gains Moo-mentum with Aussie Beef Play It ain’t crypto, but MakeDAO is making strides in its push to finance off-chain business activities. On May 9, one of the project’s vaults was used to finance a shipment of Australian beef to Hong Kong.
🪄 Abracadabra Enables Leveraged Yield Farming On Stargate DeFi lender Abracadabra has launched a new Degenbox strategy that will allow users to leverage up their yields on Stargate, an omni-chain liquidity protocol.
Terra’s Stablecoin Structure Unravels on a Wild Day The vulnerability in UST was plain to see from the outset. It was staring the market in the face. The stablecoin’s promise to redeem 1 UST for $1 worth of LUNA invited trouble.
Terra’s UST Rebounds to Around $0.90 After Depegging by 40% Terra’s stablecoin UST, the poster child for decentralized assets tied to the US dollar, rebounded sharply on Tuesday as it climbed to $0.92 after plunging 40% below its dollar peg, to $0.60, on Monday.
Compound Treasury Draws a Rating From S&P in Groundbreaking Move The capital markets, including crypto, may be a train wreck at the moment. That hasn’t stopped DeFi protocols from seeking deeper integration with the financial world, and vice versa.
Meta’s Instagram Partners With Polygon In NFT Push Instagram users will be able to post and share NFTs as soon as this week. Meta’s NFT move will be powered by Ethereum Layer 2 scaling solution, Polygon, and available to select creators, the company revealed in a video posted by CEO Mark Zuckerberg.
LUNA Loses Half its Value in 24 Hours as DeFi Tokens Crater DeFi assets are taking a beating. The combined capitalization of DeFi tokens has fallen below $100B for the first time since last August as cryptocurrencies crater.
How to Use DeFi Wallets Centralized wallets store your crypto assets on your behalf. To open an account using a centralized wallet, first verify your identity and fulfill know-your-customer requests.
Thanking all the amazing Defiers for the support and love this week (and always)!
🧑💻 ✍️ Stories in The Defiant are written by Owen Fernau, Samuel Haig, Jason Levin, and yyctrader, and edited by Edward Robinson, yyctrader and Camila Russo. Videos were produced by Robin Schmidt and Alp Gasimov. Podcast was led by Camila, edited by Alp.
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