How Can Decentralized Finance Survive the Current Crisis?

How Can Decentralized Finance Survive the Current Crisis?

Decentralized Finance (DeFi) has been in the spotlight lately, primarily because of the shocking collapse of the Terra ecosystem.  Its debacle cost tens of billions of dollars in a matter of days, creating violent shocks across the crypto market, and resulting in a loss of credibility among retail investors.  In 2021 DeFi provided investors with high rates of return, a too-good-to-miss opportunity. Now as Terra’s shock waves continue to bring down DeFi liquidity, investors are also considering their trust in crypto. One of the worst domino effects triggered by Terra came in the shape of Celsius, offering high-yielding interest accounts to 1.7 million users with $12 billion held. Now this crypto lending platform is currently rumored to be facing bankruptcy and has suspended user withdrawal requests to stabilize its operations.  To cap it all, the notable crypto hedge fund Three Arrows Capital is also facing an insolvency crisis. Clearly DeFi appears to be in trouble. But what has caused this current crisis, and why?

DeFi is an umbrella term for a set of financial activities that eliminate the need for intermediaries in traditional financial services. Loans, savings, remittances, insurance, and cryptocurrency transactions are all included. For example, some people will use DeFi to lend a friend $100 in Bitcoin, and as the lender they will earn interest on the loan without traditional intermediaries. As the FT explained DeFi is, “an umbrella term for a collection of crypto asset projects that aim to do away with a centralized intermediary — like a bank or an exchange — to provide financial services. They use DApps to execute common services like lending, savings accounts, and trading coins”. Before its collapse, Terra was considered a star product of DeFi, a payment network based on its TerraUSD stablecoin.

 

https://tva1.sinaimg.cn/large/e6c9d24ely1h3ic7wx6u2j20j40bvgmd.jpg

A skeptical view of the DeFi. Source: @ChainLinkGod.eth

Terra’s high interest bearing Anchor protocol was also supposed to resist the market downturn and be a tool for high profits whether in the bull or bear market.  But as Terra collapsed and tens of billions of dollars evaporated, those hopes were dashed. As Elizabeth Lopatto, deputy editor with The Verge explained, “Kwon’s rise and fall was fairly rapid, even by cryptocurrency standards. Luna emerged as a bright spot in the markets in December and reached its peak valuation, a touch over $116, in April; Luna was worth more than $40 billion, all told. During that time, a lot of crypto, including Bitcoin and Ethereum, was sliding. Luna’s popularity was due to a lending program, Anchor, that promised annual percentage yields (APY) of almost 20 percent — obscenely high.”

Over the past ten days, Celsius has prevented all of its estimated 500,000 users from withdrawing their money because of “extreme market conditions”. with no word on when it will be available again. As much as $8 billion in deposits is frozen. If that wasn’t enough it was reported that a week after the withdrawal freeze Celsius warned its community of a rise in fake social media accounts claiming to be from Celsius. At the same time, it paused its Twitter Spaces and AMA’s to focus on its liquidity crisis. “As has been a priority since our company’s inception, we maintain an open dialogue with regulators and officials. We plan to continue working with regulators and officials regarding this pause and our company’s determination to find a resolution,” a June 20th Celsius blog post confirmed. However, the comments to the blog post further underline how this has severely dented user trust. “I wonder how this is in the interest of the community when you didn’t ask them if they’d like to pause all chain activities. Everything you’ve said so far is lies and you will know that when the functions resume, I’d rather be in meme coin hype with 50/50 chances than this,” being typical of the overwhelmingly critical set of responses.

Hong Kong-based crypto lender Babel Finance paused withdrawals and redemptions, citing “unusual liquidity pressures”, while Singapore-based crypto hedge fund Three Arrows failed to meet margin calls from lenders. On Monday, another Hong Kong-based crypto exchange Hoo announced a halt on transactions after customer withdrawals became so great that they risked exhausting the company’s available funds, reported the FT.

In our view, problems with protocols like Terra don’t lie in the details of any one platform.  Because the current crisis was the result of a faulty model, Terra’s debacle was also fed by the belief that nothing like what has happened in the traditional finance world would ever happen in the blockchain market.  But the fact is that when you purposely remove the intermediaries which come with the traditional financial model, you also remove the safeguards that traditional finance has worked so hard to build over the past few decades, and especially after the 2007-08 credit crunch.

As it stands, DeFi is already in trouble.  According to data from DeFi Llama, the TVL of most top DeFi blockchains has dropped by 30% or more in the past month.  At the beginning of April, the total TVL (total value locked) of all blockchains was over $170 billion, and that number is now down to around $60 billion, which is a 65% decrease from before Terra crashed. “Moreover, since December 2021, the top smart contract platform tokens have lost 70% in value against the U.S. dollar as well, sliding from $823 billion to today’s $245 billion,” reported Jamie Redman in Bitcoin.com.

Some in the industry believe this change in the DeFi market capitalization is a tough but necessary step, as it will significantly reduce the emergence of risky projects and allow the industry to stabilize. However, others believe that the decline in TVL highlights deeper problems in DeFi that are not simple to solve.  And these current issues could prompt lawmakers to act sooner rather than later to create a series of more robust regulatory frameworks. An obvious example in the US is the recently tabled Responsible Financial Innovation Act which while not explicitly mentioned DeFi does seek to establish agency oversight and regulations according to which assets are securities.

As Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) continue to fall in value despite the efforts of bulls to shore up their value, making the cryptocurrency market more uncertain, there are some smart moves investors can deploy to prepare for more market volatility.  If you have funds on a DeFi platform, make sure you fully understand how the platform works and how it generates any rewards.  If you have moved all of your funds to a high-interest rate DeFi protocol, then please proceed with caution and think carefully about the consequences of a platform freeze or even crash, as this will be critical to the safety of your funds.

“While it’s far from certain the DeFi sector in its current form will fail, it’s likely to have more trouble before its problems are over.  The domino effect after the Terra crash is gradually playing itself out, and it remains difficult to predict how far it will spread.  If more major projects and institutions collapse however, it will no doubt impact on the wider crypto market. Already we’ve seen signs of this with FTX helping BlockFi with a $250 million loan, and crypto broker Voyager Digital with an even larger loan of $485 million.” Anndy Lian, Best Selling Book Author and Chief Digital Advisor to Mongolian Productivity Organization commented.

While we are all worrying that DeFi is heading downwards, we also need to remember that DeFi is created to eliminate banks and financial institutions as central intermediaries in various financial transactions. There is no stopping for DeFi. New projects are popping up during these bearish times. DeFi projects are still trying to innovate and do more.

Pollen for example, has started their second token sale and hopes to have its first index product launched by the end of the year. Pollen Virtual, a trading simulator that lets you create and manage virtual portfolios, is now on mainnet to give every trader — DeFi degen or crypto newcomer alike — a level playing field to test and showcase their trading capabilities, building reputation and earning PLN token rewards. Pollen COO William Vandyk explains:‘’The signals generated from Pollen Virtual are being used to build an Index Factory, constructing indices that anyone can buy which will hold real assets, their composition determined by collective intelligence and free from any fund management or performance fees”

Ledger is one of the most popular hardware wallets on the market are partnering with Alkemi Earn. They are integrated into Ledger Live’s Discover section. This is the first time a DeFi lending and borrowing app is available to Ledger users.

“DeFi continues to grow as we speak. Nothing is going to stop us.”

 

 

Original Source: https://www.benzinga.com/22/07/27979603/how-can-decentralized-finance-survive-the-current-crisis

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

What’s the solution to Terra’s UST and LUNA crisis?

What’s the solution to Terra’s UST and LUNA crisis?

Terra’s LUNA and UST stablecoin implosions are roiling the crypto world and beyond. Picking up the pieces won’t be easy — nor finding a good path forward.

The “road to hell is paved with good intentions,” but that’s no comfort to the many people who have lost all their money as a result of the estimated US$50 billion Terra UST/Luna crash, a crash that took place in just three short days. A decentralized stablecoin designed as the ultimate payments system “combining the price stability and wide adoption of fiat currencies with the censorship-resistance of Bitcoin”  that didn’t require any financial collateral seemed fine in principle, but when it stopped working, human collateral damage was the end result, both in terms of loss of savings and devastation of lives.

The repercussions are just starting to be felt, from talk of government regulation from U.S. Treasury Secretary Janet Yellen, to Tether temporarily losing its 1:1 peg to the dollar to as low as US$0.95, and the impact on the price of Bitcoin thanks to Terra selling off its collateral reserves in a vain attempt to shore up the value of its UST stablecoin.

To confirm the basic point driving one of the biggest collapses in crypto’s short history, last Thursday Terra’s pegged Luna token dropped in price from its high in April of US$118 to US$0.09, while TerraUSD (UST) hit US$0.04. And despite all that, plenty of self-styled #LUNAtics — the project’s fans, including developers and Terra itself — refused to admit the party was over. In a Twitter thread on Wednesday, May 11, the ever-confident Terra co-founder Do Kwon tried to sound reassuring, telling the Terra community: “I understand the last 72 hours have been extremely tough on all of you — know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together.” That didn’t work.

“You can’t mint your way out of bankruptcy all the time,” tweeted Binance CEO Changpeng Zhao, also known as CZ, after Terra announced that their blockchain had resumed block production as if there’d just been a technical hitch.

Taking a step back from this mess, what caused the collapse of the UST/Luna system? And what happened to the US$3.5 billion Bitcoin that Terra had bought to steady the ship? Rumors that either the hedge fund Citadel, the asset manager BlackRock or crypto exchange Gemini created the crash have been rejected by the companies, and persuasively shot down by B2C2 founder Max Boonen.

Any discussion of the cause of the crash cannot ignore that as an algorithmic stablecoin not pegged to any collateral, it used a two-token system, allowing users to swap Luna to Terra’s UST and vice versa for a guaranteed price of US$1, with the difference that it was based on its own layer-1 blockchain. And Terra’s UST was itself propelled by a key dApp on that blockchain called Anchor, which was offering yields of 20%. Anchor’s total value locked (TVL) grew from US$8.65 billion on Jan. 1 to US$17.05 billion at its peak on May 6. And as UST began to show signs of strain in late March, a team in the form of the Luna Foundation Guard (LFG) started to buy Bitcoin, amounting in total to US$3.5 billion between January and May this year.

It should also be noted that as an algorithmic stablecoin, UST is not a decentralized stablecoin. Terra used a consensus mechanism called “delegated proof of stake” (DPoS) that meant control was in fact concentrated in the hands of “a few validators” — no doubt the same hands that controlled the Bitcoin collateral. On May 9, LFG announced that it would “Loan $750M worth of BTC to OTC trading firms to help protect the UST peg,” which, according to Elliptic, was followed by a further US$930 million, to the same address, and the 52,189 BTC was sent together to a Gemini address. CZ tweeted on Sunday May 15, “I would like to see more transparency from them. Much more! Including specific on-chain transactions (txids) of all the funds. Relying on 3rd party analysis is not sufficient or accurate. This is the first thing that should have happened.” This was eventually confirmed by the LFG on May 16 in a tweet: “Transferred 52,189 $BTC to trade with a counterparty, net of an excess of 5,313 $BTC that they have returned, for an aggregate 1,515,689,462 $UST.” With just 313 BTC remaining (approximately $9 million, plus other assets) as highlighted by Laura Shin on May 16.

For the sake of transparency and for the crypto community as whole, not just for UST/Luna users who have lost so much, Do Kwon needs to come clean about a few things. He needs to own up to his troubles with the U.S. Securities and Exchange Commission and his involvement in Basis Cash, a previous failed stablecoin project. He needs to give a frank disclosure as to what has happened with the US$3.5 billion Bitcoin collateral, to show where it is now. He needs to talk in terms of these specifics and not provide warm words and simply talk of re-launching Terra in some form or another. If he cannot learn from his past mistakes then he’s doomed to repeat them in some form or another, and the rest of the industry will suffer the consequences.

Certainly, in the interim, we should welcome the positive attitude of SEC Commissioner Hester Peirce, who recognizes that the market does need room to allow for trial and error, but also adds that due to the variation in types of stablecoins, it’s also “difficult to craft a regulatory framework.” I’m less optimistic about Terra’s plans to resurrect the platform by forking, as CZ tweeted “forking does not give the new fork any value. That’s wishful thinking.”

In the latest twist on May 16, CZ confirmed Binance had received 15,000,000 LUNA (at a peak worth US$1.6 billion) plus had US$12,000,000 in UST from staking. “To lead by example on PROTECTING USERS, Binance will let this go and ask the Terra project team to compensate the retails users first.”

For the sake of both Terra users and the wider crypto community, things need to be sorted out as soon as possible. Practically speaking, the devil is in the detail, and that’s what we need to grapple with now, for the sake of everyone involved.

Original Source: https://forkast.news/whats-best-solution-terras-ust-luna-crisis/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j