Offchain: When The Frost Thaws

Offchain: When The Frost Thaws

The much prophesied collapse of LUNA–UST has come to pass. Is this the beginning or the end of the crypto suffering?

The biggest story in crypto right now is undoubtedly the bank run on UST.

Far and away the largest of the algorithmic stablecoins (i.e. those governed by smart contracts, not centralised organisations), UST had shot to prominence – and a US$18 billion valuation – over the last 6 months thanks to Anchor Protocol, a DeFi program that promised 20% returns on your UST, at a time when the rest of the crypto market was doing its best impression of a BASE jump gone wrong.

I wrote about the worrying ponzinomics of the whole scheme a couple of issues back, but thought we’d need to wait at least 6-12 months for the fireworks to kick off.

Yet as it turns out, a bit of volatility and the mere sense that things were going wrong was enough to spur a catastrophic depeg – UST was at one point trading at 23 US cents – and an even more catastrophic collapse in the price of LUNA, the token backing the stablecoin, down 99% in a week, taking Bitcoin and the rest of the crypto market to levels not seen since May last year.

Everybody hurts

While crypto loves a conspiracy theory – and there’s plenty circulating about large-scale market makers Citadel deliberately tanking UST to make bank on a Bitcoin short – Bitcoin was really just following the rest of the equities market into the vat of untreated sewage that is investing in 2022.

Since the beginning of the year, the NASDAQ is down 27%, the Dow Jones 11% and Bitcoin 33%. Crypto as a whole has shed the better part of US$1 trillion. (And, yes, crypto is down a whole lot more than many tradfi points of comparison, but it’s still up almost 10x from the black swan in March 2020, so I guess you take the good with the bad). The culprits are well known by now: rampant inflation, supply chain snarls and commodity shortages thanks to Vladimir’s kick-flip faceplant in Ukraine.

However, while things look grim, the brutal sell-off on Monday in both traditional and crypto markets reeked of capitulation. Single day decline records were set and the volumes were huge; crypto hadn’t seen volumes like that since last year’s May meltdown. Speaking of which…

Beware the ides of May

It’s all so clear in retrospect: May 2021 was the end of the bull run. Since then, monthly exchange users have been trending down and people have stopped Googling crypto. Even the burst to US$69k in November now looks like it was designed to engineer exit liquidity for the big players. Recent trends show that the amount being stored in DeFi protocols is rapidly decreasing and USDC is being cashed out for real USD.

But unlike previous crypto winters, this one looks set to unfold against a much changed macroeconomic background. Cheap money has dried up and the appetite for risk is marginal. The revolutionary technologies to have emerged during this bull run – DeFi, NFTs, DAOs, layer 2s and, yes, stablecoins – have shown themselves to be largely unready for primetime. Regulators are sharpening their claws. It’s hard to believe we’re going to V-shape our way out of this one.

How far we’ve come

Yet there’s another way in which this crypto winter is different. When things collapsed in 2018, crypto was toxic. Banks wouldn’t touch it, Google and Facebook both banned crypto advertising and the topic was about as conversationally welcome as an extended treatise on your bowel movements.

In 2022 there are countries developing national cryptocurrency strategies, international financial institutions and retirement funds offering crypto products, the biggest companies in the world unleashing web3 projects and the slow, steady adoption by industries as diverse as high fashion, music, gaming, sports, energy and more.

Sure, that will all slow as the markets do. But as the adage goes: bear markets are for building – and right now there’s a lot of building going on. What will emerge when the frost thaws?

Luke from CoinJar

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