‘More Systemic Risk’—The Stablecoin Fallout Could Be Just Starting As The Price Of Bitcoin, Ethereum, Terra’s Luna, Solana, Cardano, XRP Sink
The crypto market is covered in red again.
The waters are still murky after the mid-month roiling of the crypto markets. Since the big dip, most cryptos have been crab walking sideways as investors wait for the murk to clear to see where the market might be headed this summer.
Some analysts are saying the worst is behind us. Others point to the interconnectedness of DeFi platforms and the brief depegging of tether—the world’s largest stablecoin, which suggests the fallout from the LUNA
[Ed note: Investing in crypto is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
The report references a letter published Friday by Goldman Sachs that suggested the interconnection of DeFi platforms “amplify systemic risk.” It relates the story of Lido, a liquid staking protocol that got caught up in the web of DeFi.
To explain Lido it’s important to understand the concept of ETH 2.0 staking derivatives. ETH
In order to create some liquidity from these assets, Lido has developed special derivative tokens that represent staked ETH and that can be used to earn a yield on otherwise locked-up assets. (Investors receive a staked ether token (stETH) at a ratio of 1:1.)
The story might have ended there. However, holders were able to convert their stETH tokens into another token called bonded ether (bETH). bETH could then be staked on Terra’s Anchor Protocol.
According to Goldman Sachs, when UST collapsed and the Terra blockchain halted, this interconnection of DeFi platforms resulted in stETH trading at a 4.5% discount to ETH.
This is just one example of the many interweavings of DeFi protocols. Another is Deus Finance’s DEI coin dropping to 52 cents before reaching its current value of $0.75.
Will there be more examples of the risks of interconnected DeFi platforms in the future? Could instability in the stablecoins spread to broader financial markets?
The fear is real. Morgan Stanley
However, in a note published on May 13, Citi said it does not expect broader economic fallout due to the fact that the digital-asset market is relatively small compared with traditional asset classes.
And according to Bank of America
That said, Citi goes on to point out that the death of UST will stir up more regulatory scrutiny for stablecoins. Although it could fan the flames in the short term, many agree it’s a necessary “evil” to avoid these types of risks in the future.
Stay ahead of the crypto trends with Meanwhile in Markets…
Every day, I put out a story that explains what’s driving the crypto markets. Subscribe here to get my analysis and crypto picks in your inbox.