the definition of cryptocurrencies from a Wall Street billionaire

“When I read about the @terra_money ‘algorithm’ it sounds like a crypto version of a pyramid scheme.” This is how the billionaire Bill Akcman, CEO of a major US financial institution, defined stablecoins after the sharp drop last week.

“Investors were promised a 20% return backed by a token whose value depends solely on the demand of new investors in the token”he said about it. And he added: “There is no fundamental underlying business.”

The tweets of Ackman, CEO of Pershing Square Capital Management, appear a few days after the strong implosion in the prices of cryptocurrencies, dragged by the collapse of the Terra USD crypto, which was the third in market capitalization and whose price it went from US$100 to US$0.47 in a few days.

On Luna Terra, the billionaire assured that “the digitization of Luna’s scheme and the hype about cryptography allowed him to reach a huge scale quickly”.

In that sense, Akcman warned that while “Blockchain is a brilliant technology with enormous potential. Schemes like Luna threaten the entire crypto ecosystem.”.

“The cryptocurrency industry should self-regulate other crypto projects with no underlying business models before crippling regulation shuts out the good and the bad,” he said.

What are stablecoins

To avoid the price volatility associated with the world of cryptocurrencies, stablecoins were created. These are tokens that are associated with the value of an asset in the traditional financial world that can be considered safer, such as “fiat” currencies (such as the dollar or the euro), material goods such as gold or real estate, or another cryptocurrency.

There are also ‘stablecoins’ that are not associated with any other currency but are controlled by algorithms to maintain a stable price.

What happened to Terra USD?

Unlike other stablecoins that have collateral from the physical world behind, such as DAI or Ether, which are backed by the dollar, the Terra project was based on an algorithmic collateral, which was responsible for maintaining the parity of its price and that of US currency. This was an aspirational one in the crypto world: a coin that did not need backing outside the blockchain network to operate and guarantee returns.

The operation is somewhat complex. Anyone who has 1 UST can immediately exchange it for the number of Luna cryptocurrencies that are necessary to obtain a value identical to that of a dollar.

If at any point UST is worth less than $1, holders of this stablecoin have an incentive to buy it cheap, turn around, and exchange it for the equivalent of $1 worth of Luna. Conversely, if at any point TerraUSD were to trade above $1, the incentives line up for traders to buy Luna, trade it for the stablecoin, and then sell UST for more than $1.

The fear in the markets after the latest Federal Reserve rate hike increased volatility and negatively affected the prices of other more “traditional” cryptocurrencies, such as Bitcoin, which in turn functioned as collateral for this stablecoin. In this way, many UST holders went out to sell massively, after this crypto lost its reference value with the dollar.

This had already happened some time ago, but parity had quickly been recovered. Instead, this time the imbalance extended over time and although the creators of Luna managed to sustain the drop at 0.9 dollars per coin for a while, then an unstoppable price drop began.

Within a few hours, TerraUSD, the third largest in the market, saw its value fall almost 80%.

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