The demise of the Terra blockchain sent a ripple effect throughout the crypto ecosystem last week, as the market absorbed over 80,000 BTC deployed in a failed attempt to keep the UST "stablecoin" pegged 1:1 with the US dollar.
“If you’re a market maker and you don’t make money in those kinds of days, then yeah — you’re doing something wrong,” said Evgeny Gaevoy, CEO of Wintermute — an algorithmic crypto market maker with nearly $2 trillion in cumulative volume, according to the firm’s website.
In this episode of The Scoop, Evgeny Gaevoy recounts the Terra meltdown from a market maker’s perspective, and explains how future decentralized yield-bearing stablecoins can innovate where Terra's UST failed.
According to Gaevoy, the 20% annualized yield promised to users who deposited UST into Terra’s Anchor Protocol was more debt than could be paid by the protocol’s revenue:
“What was really wrong about LUNA is they had that 20% yield which was coming out of nowhere,” he said. “It was backed by future growth of the protocol, which could have happened, but didn’t.”
Although UST has proven to be a failure, Gaevoy thinks an interest-bearing stablecoin is possible, as long as the promised yield is equivalent to the issuing protocol’s revenue.
To illustrate, Gaevoy proposed a hypothetical protocol that brings in $500,000 a year in revenue and seeks to raise $5 million through offering interest-bearing stablecoins:
“Let's say they have cash flows of $500,000 per year — they can issue $5 million worth of stablecoins with 10% yield, and then suddenly they have $5 million and they can pay this yield because they actually generate this income. So they can offset these interest payments with what they generate from their own protocol — that model can work, and that model I think is really interesting to explore for a lot of protocols.”
Wintermute is in the very early exploratory phase of launching its own stablecoin, according to Gaevoy, who said the firm “just needs to iron out the regulatory details.”
During this episode, Chaparro and Gaevoy also discuss:
- Angst towards venture capital in crypto
- Collateral damage from the Terra implosion
- The sustainability of inflated crypto valuations
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This post was edited to clarify that Wintermute's exploration into launching its own stablecoin is in the very earliest stages of development.
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