Dai Creator Rune Christensen on Terra's Collapse
The founder of one so-called decentralized stablecoin thinks Terra’s collapse is a wake-up call for anyone who hasn’t already seen the inherent risks in another kind of stablecoins – uncollateralized, algorithmic stablecoins.
Rune Christensen, a Danish entrepreneur who founded MakerDAO, also said the crypto industry should enforce strict standards for stablecoins – like collateral requirements – to prevent another financial crisis like the implosion of UST, which erased $40 billion of the coin’s value in less than a week.
It might be convenient for Christensen to say that. His stablecoin platform, which went live in 2015, and which is now overseen by a decentralized autonomous organization (DAO), has always required that users put up real capital if they want to mint its token, the dai, which is pegged to the U.S. dollar.
“The natural end point is that algorithmic stablecoins are … collateralized, because that’s the only way you can protect your users,” Christensen said Thursday on CoinDesk TV’s “First Mover.”
MakerDAO was the first Ethereum-based tool that allowed anyone to mint dollar proxies by collateralizing their crypto. For every dai in circulation, there is roughly double the amount of crypto held in reserve.
Terra, on the other hand, tried a different model. Instead of holding assets in reserve, it used an algorithm and a related free-floating cryptocurrency called LUNA to try to keep its synthetic dollar asset, UST, in line. Like all other “algorithmic stablecoins,” UST met a catastrophic end.
Christensen said it was obvious for others in the community that Terra would collapse long before it did.
“It was completely clear and sort of common knowledge that this model just didn’t work,” Christensen said.
That didn’t stop Terra’s founder Do Kwon from attacking Maker and its stablecoin, at one point even making the grand claim that “By my hand $DAI will die.” About a month after he made that statement, at about the pinnacle of Terra’s success, Kwon’s network entered its fated “death spiral.”
Boom and bust
According to Christensen, Terra functioned like a Ponzi scheme. It was a project that benefited from prices shooting up, mass speculation and Kwon's braggadocio. Eventually, all massive booms must bust.
"The people in the community that were subjected to this have created some kind of community bond and intangible value that goes beyond the economics of the system," he said.
Christensen said that although he was expecting Terra to collapse, he was devastated when it actually happened.
“I wasn’t exactly in the mood to say ‘I told you so.’ It was a human tragedy,” he said.
The fault clearly lies with Terra and its managers, primarily the bombastic Kwon. Terra’s leadership hid risks and built products meant to intentionally lure in investors, like the Anchor Protocol, which offered an unsustainable 20% return on UST holdings.
“They were using services that were giving them a high return and then [Terra] was hiding the fact of where they were getting that from,” Christensen said.
Terra’s collapse may have a prolonged fallout, and users may become concerned about investing in any stablecoin backed by volatile assets – like dai.
In dai’s case, the currency is overcollateralized, directly backed by ETH, USDC and other cryptocurrencies.
“Nobody needs to trust anybody. You can check for yourself that all the collateral is there,” he said, noting the advantages of the blockchain.
Other stablecoins managed by corporate entities, like USDC, offer transparency through regular disclosures and may appear to be a simpler choice. He also said that tether, a controversial centralized stablecoin, is “probably sound.”
A new proposal to fork the Terra blockchain to try a different approach including adding collateral and other failsafes may point to a bigger message about community resiliency and bonding, but the sentiment may be a little too late.
“There’s a risk it isn’t going to work because … of political fracturing,” Christensen said. He added that a plan to redistribute Terra’s remaining treasury assets to small holders has been fraught with indecision and mismanagement.
“No matter what the community attempts to do, the main objective should be to reimburse the UST holders,” he said. He added that some so-called lunatics may suffer from a “sort of Stockholm Syndrome,” but that may itself point to the “inherent resilience and value of decentralized communities.”
None of this is to say algorithmic stablecoins are dead. But a safer option might be to treat them a little bit more like traditional financial assets. When it comes to regulating algorithmic stablecoins, Christensen could eventually see a point when issuers must meet a threshold collateral requirement, like banks. Or Maker.
– Fran Velasquez
