What might the guy who invented our currency say about today’s world of cryptocurrency and DeFi (Distributed Finance)?
A bit of history
Thomas Jefferson (you know, one of the guys who signed the Declaration of Independence) was a smart guy and was thinking about the monetary system for this new country, the United States of America. So, he put his recommendation down on paper and wrote Notes on the Establishment of a Money Unit, and of Coinage for the United States in 1784.
He advocated for using the dollar and making smaller units decimal fractions of the dollar. Obvious, right? But he was the first to advocate such a system and the United States was the first country in the world to adopt one. (Although Congress messed up his plan with the quarter instead of a 20-cent piece.)
His defense for the decimal system was summed up in this statement: “…in all cases where we are free to choose between easy and difficult modes of operation, it is most rational to choose the easy.”
Smart, techy people around the world are recommending a new approach to currency and banking based on computer programs and algorithms. Bitcoin is now “old” in that it was introduced in 2009. It’s well recognized but not in favor because of its huge energy usage.
But it’s not alone. We also have Ethereum, Cardano, Tether, Solana, Dogecoin, TerraUSD, Luna, and many, many more. They all have the same basis of being digital instead of paper notes or coins. And, supposedly, since there is no money to count, we don’t even need banks.
Their big drawback is their volatility, since they are not generally backed by “real” assets.
TerraUSD, Luna, and Anchor
Earlier this month, the story of TerraUSD, Luna, and their quasi-bank, Anchor, hit the news – and not in a good way.
TerraUSD was touted as a “stablecoin” (A digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold to reduce volatility.) However, rather than dollars or gold, it was backed by Luna, which was just another cryptocurrency. But these cryptocurrencies were linked by, essentially, an inverse algorithm. Supposedly, this would keep the TerraUSD stable.
It seemed to work. In 2021, Luna’s price increased a 100-fold and nearly $10 billion worth of TerraUSD stablecoins were created. Happy days!
To make it even more complicated, Do Kwon, the tokens’ creator, introduced Anchor, a quasi-bank for crypto users. They could “deposit” their Terra stablecoins and earn 20% interest. (20%! Not even Bernie Madoff promised that!) However, unlike a real bank, there was no deposit insurance.
Unfortunately, just like in the “old days” there was a “run on the bank” and system collapsed. The price of a Luna, once worth more than $100, dropped to $0.00001834 and the TerraUSD was no longer stable. Gone!
Cryptocurrency is not dead and will play a role in our financial system “someday.” But like any new technology, the early adopters see it happening soon while the detractors hope it never happens. The reality will come somewhere in between.
Listen to Mr. Jefferson. He was a smart guy.