Editor’s Note: The UST coin designed to retain a value of $1 at all times, depegged on May 9. As a result, Luna, the centerpiece of Terra’s ecosystem collapsed in one of the most stunning crypto crashes ever recorded. Read more here. 

The co-founder of Terraform Labs, Do Kwon, made waves in early March of this year when he announced a $10 million wager on the future price of Luna Coin (LUNA), the native token of the Terra blockchain. Pitted against a crypto personality known as GCR or Gigantic Rebirth, Kwon is set on proving his social media critics wrong on Terra’s vision of a stable digital currency. 

Founded in 2018 and based in South Korea, the Terra blockchain supports a decentralized finance (DeFi) ecosystem that creates stablecoins pegged to reserve assets such as the U.S. dollar. Luna Coin is currently ranked 8th among the top crypto currencies by market value. With approximately $29 billion locked in total value, Luna is the second largest DeFi protocol behind Ethereum. Similar to Ethereum’s founder Vitalik Buterin’s rise to fame, Kwon has now risen to become one of the most influential—but also controversial—figures in the space.

“Right now, my role in the crypto industry is a little polarizing,” Kwon said in an interview with Bloomberg. “Because, you know, we’ve been making a lot of big moves. And that ruffles some feathers.” He promises a future of algorithmic stablecoins free from Wall Street and government regulators; however, many critics are skeptical due to a track record notorious for underperforming and fraud.

The Instability

Part of an extensive ecosystem, stablecoins play an important role as a practical and cost-efficient option for speculators to stash their money and avoid large market swings. Stablecoins are digitally native, global and (most importantly) accessible 24/7 on the internet; they seek to maintain a 1:1 relationship with traditional currency such as the U.S. dollar. The most popular stablecoins include Tether and USD Coin (USDC). 

While conventional stablecoins hold cash or bonds to back their digital coins by a dollar’s worth of real assets, algorithmic stablecoins are not necessarily backed by any assets because they rely on financial engineering to maintain their link to the dollar. Such algorithms allow traders to create and destroy coins as needed to maintain their price. As a result, many critics have pointed out that algorithmic stablecoins only maintain their price because traders expect the coin to have value in the future.

“Algorithmic stablecoins could be prone to “bank runs” if traders keeping the price afloat decide to take their money out of the system over a short period of time,” said Dr. Ryan Clements in his Wake Forest University Law Review last October. 

Investor Mark Cuban notoriously lost money to the algorithmic stablecoin IRON when it lost its dollar peg after a selloff by large investors– ultimately stating that stablecoins will be the first to get regulated.

Growing Regulatory Pressure

Tether caught the attention of regulators when it paid $18.5 million in settlements with New York attorney-general Letitia Jones who accused the company and sister exchange Bitfinex of “[covering] up massive financial losses.”

There is now growing belief that stablecoins should be regulated as banks: a report released last October by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions proposed that those who issue stablecoins should be “subject to supervision and regulation at the depository institution level by a federal banking agency” and “consolidated supervision and regulation by the Federal Reserve at the holding company level.”

Betting On the Future

Despite the critics, Terraform Labs have remained steadfast. Kwon said he has “pretty high confidence that Terra will be the largest stablecoin in the next two years.” He is certainly one who puts his money where his mouth is.  

In an interview with TechCrunch, Kwon revealed he had purchased “$1.6 billion in bitcoin so far and plans to purchase an additional $1.4 billion with capital from Luna Foundation Guard.” This strategic decision is part of a roadmap for Terra to deepen the stablecoin’s integration in the crypto ecosystem. 

ABOUT THE WRITER 

Ivy Tsang is a Tech Innovation Fellow at Identity Review from the University of Southern California, where she explores the intersections between the Arts, Technology and Business of Innovation. 

Do you have information to share with Identity Review? Email us at press@identityreview.com. Follow us on Twitter @IdentityReview

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