Three-And-A-Half Lessons From the Terra LUNA Fiasco
Three-And-A-Half Lessons From the Terra LUNA Fiasco
Plus, major league sports enter the metaverse.
Number of the Week: 38% (explanation below)
Three-and-a-Half Lessons From the Terra LUNA Fiasco
Maybe cryptocurrency has had a worse week than this one, but if you’ve got a nominee, please leave it as a comment. Old-school market writers have been incorporating the downward trajectories of Bitcoin and Ethereum for months now—and let’s not ignore the roughly 10% loss in value there over seven days. But the real terror this week was in the world of stablecoin, as the Terra/LUNA one-two punch imploded. As recently as early April, LUNA, one of the crypto coins from Terraform Labs, was the world’s largest DeFi token by market capitalization, at about $35 billion. As we publish midday May 15, that number is well below $2 billion. On Friday, FIN published a background explanation on Observer.com. Here are some lessons this tumultuous week has taught us:
Stablecoins…aren’t. It can be easy to forget that even a cryptocurrency ostensibly pegged to a real-world currency (like the US dollar or Japanese yen), and maintaining a 1:1 relationship throughout the entire two to three years of its existence is, at the end of the day, still a cryptocurrency. Just as cryptocurrencies can go up based on no obvious developments in the physical world, so can they go down, especially if developments in the physical world—such as rising interest rates—spook investors.
(a) Algorithmic stablecoins are not as smart as they seem. There is an almost irresistible elegance behind the idea of algorithmic stablecoins. A fixed mechanism controls the supply of Terra; as the Terraform Web site puts it: “Users burn Luna to mint Terra and burn Terra to mint Luna, all incentivized by the protocol’s algorithmic market module.” Controlling the supply this way, we were told, created incentives for the Terra USD coin to stay at its 1:1 peg to the dollar. The putative virtue here is that a stable price for Terra is maintained without any authority (such as a central bank) needed to intervene. The factual vice, as witnessed this week, is that the setup is just as vulnerable to an external run as any stock market or banking system. As US Treasury Secretary Janet Yellen said in a Congressional hearing on Thursday, stablecoins “present the same kinds of risks that we have known for centuries in connection with bank runs.” (It’s been alleged that the whole saga was a staged attack, but the system is vulnerable regardless.) Terra/LUNA isn’t the only algorithmic stablecoin to lose its dollar peg, merely the largest. In April, the Neutrino stablecoin traded well below a dollar and dipped again in the wake of Terra’s plummet.
Bitcoin is not a great backup. In mid-March, Terra surprised many in the crypto world by announcing that it would purchase up to $10 billion in Bitcoin to function as a reserve backing up the currency. Perhaps that seemed like a good idea at the time, but in the ensuing two months, Bitcoin has lost about 25% of its value. And more important, the world of stablecoin is heavily intertwined with the trading of cryptocurrency and other digital assets, and so it seems at least a little predictable that when one half of the equation was suffering, the other intertwined half would not be able to prop it up.
Regulation is coming. This has been clear for a while; back in July, FIN published a two-part series on what stablecoin regulation might look like in the US. Europe might get there first. The implementation of the Markets in Crypto-Assets Regulation is supposedly only months away. Coindesk reported this week on a paper circulating within the European Commission that would halt trading of any stablecoin if it hit a value of above about $200 million or exceeded a million transactions in a day. The paper, however, is not an official position.
Take Me Out to the Metaverse, Take Me Out to the Cloud
This post was originally published on Observer.com.
The 2020 Major League Baseball regular season was drastically shortened, 60 games as opposed to the traditional 162. But even more drastic: all the games were played in venues where there were no fans in attendance. Many teams put cutout fan pictures in seats and piped in recorded crowd noise, but really there was no substitute for the real thing.
Join us for a roundtable conversation on Money and the Metaverse May 19.
Maybe there still isn’t, but the world of professional sports is moving a lot closer to a realistic fan experience that doesn’t require actual attendance. This week, the Atlanta Braves announce that they have constructed a metaverse reproduction of Truist Park, apparently the most complete simulation of its kind in American sports.
The simulated park is the creation of the Atlanta-based virtual platform company SURREAL Events, and is built using Epic Games’ Unreal Engine technology. The project has the blessing of Major League Baseball (MLB) and the Braves organization. “It’s exciting to create a new way for our fans to connect with our team and their favorite ballpark,” said Derek Schiller, Atlanta Braves President & CEO, in a statement. “The digital version of Truist Park will offer limitless opportunities to create unique fan engagements in the metaverse and we are proud to be the first team to offer this immersive experience.”
One of the inspirations for Digital Truist Park was the innovative work that rapper and producer Travis Scott produced in the Fortnite metaverse, particularly the Astronomical performance inside the video game that was viewed by more than 45 million people.
“We started prototyping the stadium in summer 2021, and announced it late last year,” said Josh Rush, cofounder of SURREAL Events. Other large sports organizations are likely to follow suit. In February, the English Premier League team Manchester City announced a partnership with Sony to create a metaverse version of its Etihad Stadium.
A metaverse-based sports arena offers several obvious revenue sources, beginning with sponsorship. Just as large corporations are willing to pay millions and tens of millions of dollars for real-world stadium naming rights and billboards, presumably they will pay to place their logos inside digital parks. Total Major League Baseball sponsorship in 2021 amounted to $1.13 billion, according to the consulting group IEG.
Similarly, the Braves envision selling tickets to virtual attendees. Currently, the Braves metaverse does not allow virtual attendees to watch a live game. But simulated game play is already fairly sophisticated; since 2020 there has been a MLB virtual reality app available for Oculus Quest to watch live games, although it requires a pricey subscription to MLB.TV. A digital stadium allows for many opportunities that are hard or impossible for physical arenas to provide. For example, a large group of fans could “sit together” in the same section, even if it is largely sold out in the actual park. Pivotal moments in a game, such as a grand slam, could be transformed into nonfungible tokens (NFTs) and instantly sold and traded like baseball cards.
Merchandise sales are another promising revenue source. Video gamers and music fans have shown themselves willing to spend hefty sums on digital merchandise. A December 2020 Lil Nas X concert on Roblox, for example, generated millions of dollars in digital merchandise sales, according to a Roblox executive. A report from Grayscale estimates revenue from virtual gaming worlds was approximately $180 billion in 2020 and could grow to $400 billion in 2025.
The outlet’s revenue possibilities are not limited to sports, notes Greg Mize, the Braves’ vice president of marketing and innovation. “We can offer concerts, we can offer meet-and-greets,” he told FIN.
You read it first in FIN!
FIN, March 13: “One thesis you hear from cryptocurrency advocates is that the constant gut-twisting price volatility is a function of the assets’ novelty; low liquidity…and scarcity of price signals. As the market matures, and as scaffolding around crypto is erected, the thesis holds, crypto volatility will come down and everyone will get rich in a more stable fashion. This week, a piece of the scaffolding fell into place, as Miami-based lender Milo announced a $17 million Series A round. One of Milo’s principal offerings is what it credibly claims is the first 30-year mortgage in the United States that can be backed by cryptocurrency as collateral.”
Tearsheet, May 2: “After announcing the launch of the crypto-backed mortgage back in January 2022, the Miami-based digital lender Milo debuted its service to clients in March 2022 – by claiming to be the first crypto lending company with a 30 year mortgage product. It has a growing waitlist for the product. In the same month, Milo secured $17 million in funding to keep up with the growing demand, expand operations, and further facilitate crypto holders to buy real estate.”
FINvestments
🦈Number of the Week: An international survey conducted by Morning Consult found that a formidable 38% of China residents reported using a digital wallet every day in February. The comparable number in the US is 6%; 51% of Canadians said they didn’t use a digital wallet once that month.
🦈Altro, a startup that helps consumers build a credit score based on recurring transactions like Netflix subscriptions, announced an $18 million Series A round this week. Early investors included Jay-Z and Citigroup.
🦈Berlin-based Elucidate this week unveiled an $8 million round to help banks fight financial crime and money laundering.
