Stablecoin: The Difficult Journey from Terra to GENIUS

Author: Tom Carreras, Source: Coindesk, Translated by: Shaw Jin Se Finance

Do you remember Terra? Do Kwon's Layer 1 design allows its native token LUNA to complement the network's algorithmic stablecoin UST. When you mint new UST, LUNA tokens are burned (thus limiting supply), and when you redeem UST, new LUNA is generated (increasing supply).

As long as the demand for UST is strong, the system works well—this was indeed the case for a period of time, thanks to the annual interest rate of 20% offered by the Anchor Protocol. However, in May 2022, a massive sell-off caused UST to lose its peg to the dollar; market participants rushed to redeem UST, generating a large amount of new LUNA, which in turn drove the price of the token down, leading to even more UST being redeemed, creating a vicious cycle. Within 72 hours, over $40 billion in market capitalization evaporated.

The collapse of Terra shook the struggling cryptocurrency industry at the time. The cryptocurrency hedge fund Three Arrows Capital went bankrupt, while lending institutions like Voyager, BlockFi, and Celsius also faced bankruptcy. Worse still, the U.S. imposed sanctions on Ethereum's Tornado Cash, causing panic among developers worldwide.

In November 2022, reports indicated that Alameda was likely bankrupt, leading people to start withdrawing funds from FTX, which resulted in Sam Bankman-Fried freezing withdrawals. It was discovered that SBF had been fraudulently misappropriating FTX customer funds for years to cover losses at Alameda Research. Shortly after FTX filed for bankruptcy, SBF was arrested (and subsequently sentenced to 25 years in prison).

Shortly after the collapse of FTX, Gary Gensler, the Chairman of the U.S. Securities and Exchange Commission (SEC), began taking strict actions against the industry, suing a number of cryptocurrency companies (including Coinbase and Kraken) and ushering in an era of "enforcement regulation," a move that was met with unanimous condemnation from the industry and crypto-friendly members of Congress.

The dilemma of cryptocurrencies has not ended here. Cryptocurrency lending institutions Genesis and Bitcoin miner Core Scientific soon joined the ranks of the frustrated. Worse still, in March 2023, three cryptocurrency-friendly banks (Signature, SilverGate, and Silicon Valley Bank) faced bank runs and collapsed, making it increasingly difficult for cryptocurrency companies to access banking services. Prominent cryptocurrency venture capitalist Nick Carter accused the Biden administration of attempting to "de-bank" the cryptocurrency industry by adopting strategies from the Obama era, a view that subsequently gained support in Congress and the Trump administration.

But the lucky wind finally turned towards cryptocurrencies. In June 2023, BlackRock applied to launch a Bitcoin spot ETF, which felt like Larry Fink himself had launched a flare in the dark, signaling that Wall Street was ready to embrace cryptocurrencies. Two months later, Grayscale defeated the SEC in court, successfully converting its Bitcoin trust into an ETF. The agency had no choice but to approve a dozen Bitcoin spot ETFs in January 2024, which later became the most successful new type of ETF in history.

The SEC initially showed hesitation towards the launch of a spot Ethereum ETF, but at the last moment, some observers suddenly linked this change in attitude to Trump’s new friendly stance towards the cryptocurrency industry, which stands in stark contrast to Joe Biden's hostile attitude. The cryptocurrency industry has undoubtedly played a role by donating large sums to Trump’s campaign (as well as to other pro-crypto politicians); yesterday we saw that the Democrats, who had aligned with Elizabeth Warren's anti-crypto campaign, strongly voted in favor of the GENIUS Act and the CLARITY Act this time.

Trump's overwhelming victory in November caused a stir in Washington and the cryptocurrency industry.

The new government is honoring its commitments, despite some minor setbacks regarding the Trump and Melania-themed Meme coins. Ross Ulbricht has now been freed, and the president signed an executive order establishing a Bitcoin reserve (with several states, such as Texas, Arizona, and New Hampshire also following suit). The Treasury's Office of Foreign Assets Control has removed Tornado Cash from the sanctions list, while the U.S. Securities and Exchange Commission has dismissed most of its lawsuits and is preparing to approve a batch of new cryptocurrency exchange-traded funds. De-banking is no longer an issue.

At the same time, Congress has just passed the GENIUS Act, which establishes a framework for the regulation of stablecoins. (It's hard to imagine this after the Terra collapse), and it is likely to pass the CLARITY Act, which is a more complex piece of legislation that clarifies the jurisdiction of the SEC and the Commodity Futures Trading Commission (CFTC) regarding cryptocurrencies, by the end of the year.

Not to mention that Coinbase's stock trading price is at an all-time high, Tether is now regarded as one of the most successful companies in the world, Circle has gone public, Core Scientific (revived) is expected to be acquired by the AI company CoreWeave, and Michael Saylor's strong promotion of Bitcoin has spawned a large number of companies that emulate him, all of which are buying as much Bitcoin (or ETH, or SOL, or even DOGE) as possible.

All these events are reflected in the price of Bitcoin. After the FTX bankruptcy, you could briefly buy BTC for $16,000, and now the price is around $120,000, with the total market capitalization of the entire cryptocurrency industry nearing $4 trillion (which was $830 billion in December 2022).