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DeFi and Credit Risk

Tether and Bitfinex CTO Paolo Ardoino stated the Terra (LUNA) initiative was "poorly planned," not meant to be a rug pull.

Ardoino compared its algorithmic stablecoin TerraUSD (UST) to a "castle of cards" that might collapse at any time in response to the Terra ecosystem's market-shattering disaster.

Many in the crypto world have raised concerns about Terraform Labs founder Do Kwon's behavior, citing a long history of suspicious words and acts. Kwon was also said to have worked on "Basis Cash," a previously unsuccessful algo-stablecoin project.

Ardoino made the remarks on the Reimagine Unplugged podcast this week, which is produced by Reimagine, a media firm that specializes on Web3 content and events. The CTO claimed that Kwon's erroneous feeling of self-confidence was a major issue:

"I'm not familiar with Do Kwon." However, we should give him the benefit of the doubt. He developed this project with arrogance and the belief that he was correct, and many people supported him, ostensibly for economic reasons, but it was not a rug pull right, it was a badly constructed project, as many projects are."

"That there was something like a card castle that could fall down, but he couldn't mention it since it would have fallen down much faster otherwise." And, once again, it was evident to me, and many others, that it was a horrible idea," he concluded.

The UST had become too large to maintain its peg, according to the CTO, since its collateralization (at the time, mostly in Bitcoin as it sought to accumulate reserves) was insufficient to support the stablecoin but was still "huge enough to collapse the market even more."

"They were basically in a cascade position where they had to protect the peg, so they had to sell the collateral, and selling the collateral was generating further crashes, and these extra crashes were driving them to sell more of collateral, and so on," he explained.

When asked about the future regulatory landscape for stablecoins, Ardoino advised that legislators first identify the distinction between stablecoins that are entirely backed by assets and those that are mostly supported by algorithms:

"I believe the first step is appropriate categorization of stablecoins; for example, Terra UST is an algorithm stablecoin, whereas Tether is a centralized stablecoin." So two distinct monsters with two distinct promises, backings, and so forth."

Tether's commercial paper assets underpinning its USDT stablecoin reserves decreased by 17 percent in Q1, according to Cointelegraph. As part of its legally mandated reporting as a result of the $18.5 million settlement with the Office of the New York Attorney General from January 2021, the business additionally underlined that its stablecoin was "fully supported" with $82 billion in reserve.

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