The collapse of the stablecoin TerraUSD was a bittersweet vindication for Rune Christensen, CEO cofounder of the decentralized crypto project MakerDao, as he had a long track record of arguing that Terra’s model was fundamentally flawed from the beginning.
TerraUSD is an algorithmic stablecoin whose value was pegged at $1. In order to defend that peg, users of TerraUSD were always able to exchange 1 TerraUSD USTUSD, -17.68% for $1 worth of an associated cryptocurrency, LUNA. But there was nothing that guaranteed LUNA’s LUNAUSD, -6.67 value beyond the collective confidence of its holders, a confidence that vanished in short order earlier this month.
Founder Do Kwon last week on Twitter said he was ”heartbroken” following Terra’s crash.
Kwon announced what he said is a plan to “rebirth a new Terra blockchain and LUNA” on Twitter Wednesday.
MakerDao, built on the ethereum ETHUSD, -3.91% blockchain, issues the Dai stablecoin that is backed by a diverse pool of crypto assets. It is known as “overcollateralized” because users have to post more than $1 worth of crypto assets to get back $1 worth of Dai DAIUSD, 0.00.
MarketWatch caught up with Christensen over video conference Thursday to get his take on the crypto landscape in the wake of the Terra drama and a broader decline in the crypto market. The interview has been edited.
What’s your take on what happened to Terra?
The model that Luna and Terra used, which is nowadays called the algorithmic stablecoin, was invented all the way back in 2014. It was sort of a theoretical idea that everyone could just tell by looking at it that it wasn’t going to work.
During the bull market we just went through, these types of stablecoins started popping up. Terra somehow managed to have more legitimacy and more momentum and actually grow to this massive size.
But it was still obvious that these models didn’t work. It was completely clear. You can’t create money out of thin air. You can’t back something with itself and expect it to remain stable.
It was long overdue to collapse, and it was a tragedy that it was allowed to get so big, in part because it had a lot of major backers who created more legitimacy for it.
Why do you think sophisticated investors were drawn to this model?
Greed allows people to pretend that 1 plus 1 doesn’t equal 2. The promise of being able to print free money is just so strong.
They probably believed there was a chance it could work. There are also some really hardcore public figures that supported Luna and have gained credibility because they actually lost everything. So some of them truly believed that it worked and held on to the end and lost everything.
But there were others…[who] may also have been smart enough to understand that it was basically a ride you only want to take on the way up.
The appeal of Terra was in part because it was decentralized, and there’s a lot of debate as to whether Dai can credibly be called decentralized. What are your thoughts on this discussion?
The Luna community in particular liked to attack Dai, saying it’s not decentralized because it uses USDC USDCUSD, +0.01%, a centralized stablecoin, as part of its collateral.
The reason why Dai ended up doing that is because the original model that only used ethereum, it used these overcollateralized positions that ensure there’s always more ethereum than there’s Dai in circulation. The problem is you can’t control how much demand there is for people to bet on the price of ethereum.
The only way to scale Dai as demand kept growing was to add something you can easily scale, such as every time somebody wants to have more Dai you can just back it one-to-one with USDC.
From the perspective of single points of failure and decentralization, it’s not ideal to have huge amounts of exposure to just a single, centralized stablecoin. On the other hand it’s better than collapsing and going to zero. So in terms of the choices available, especially at the time when demand started to outstrip the ability to generate supply purely from ether, it was the right choice.
It’s always just a question of how to protect Dai users. Ultimately the holders of the MKR token MKRUSD, -1.71% that confers voting rights, their incentives are aligned with users of Dai because they have to backstop any losses that occur.
It’s obvious that you don’t want to have, whether its centralized or whatever, you don’t want to have all your collateral in a single token. So the community is working very hard to diversity out of USDC into coins like USDP, Paxos USD and Gemini USD.
Is this argument over centralization a productive one?
Centralization exists on a spectrum. You can look at different blockchains and some of them have hundreds of thousands of nodes and others maybe have 100 nodes and some have, like 20. They may all be decentralized, but they’re different levels of decentralization.
You shouldn’t really be thinking only about decentralization. You should be thinking about risk. Centralization isn’t the only type of risk you need be worried about, as evidenced by Terra, right?
It’s just one of many things that you need to consider if your goal is to create something that is stable, useful and relevant.
Where is DeFi going from here?
Now that blockchain has gone through these two major bubbles, one in 2017 and the huge bubble and crash we just had, I think we’re at the end of the honeymoon phase where people had this sense that something amazing is coming just around the corner that’s going to solve all the problems of finance.
The blockchain and DeFi still have the potential to make financial transactions much more efficient and cheap and major financial institutions and banks are working to get real financial instruments on the blockchain.
Societe Generale in France, for instance, is doing experiments where they have created these tokenized assets on MakerDAO, and we’re going to see what kind of benefits this provides.
See also: Prelude to the future of finance? SocGen is raising a loan from a DeFi protocol to refinance tokenized bonds
The collapse of Terra has brought into focus efforts in the U.S. to regulate crypto broadly and stablecoins in particular. What are your thoughts on this debate?
Before the Maker Foundation [which Christensen previously ran] was shut down because MakerDao became sufficiently decentralized to run on its own, we were eager to interact with regulators because we saw regulatory interaction and education as a cornerstone of making stablecoins work.
I’m a big supporter of regulation in general. Regulation exists for a reason and it can be a huge benefit for the space. If it’s done right it can be a huge benefit, it can create confidence and bring more people into the space.
Something like requiring disclosure of what’s backing a stablecoin, it obviously needs to be required by law. It makes no sense to create a product, call it stable and then say I’m not gonna tell you how it’s backed.
The space needs to grow up a little. It makes perfect sense for governments, if somebody is selling a black box and giving all sorts of promises about it, to bring protection to its citizens. It’s a financial transaction like any other and people shouldn’t be allowed to use the excuse that it’s blockchain, so we can just go out and cause harm to people.