What's up, everyone? This is Anthony Pompeo. Know most of you know me as pomp. You're listening to the pump podcast. Simply the best podcast out there. Now. Let's kick this thing off. Today's episode is about a 10 billion dollar Bitcoin, bet on stable coins. We dive into Tara and you Estes plans to back their stable coin with Bitcoin. I really hope that you enjoyed this episode. But before we get into it, I want to First tell you about our sponsors. First up is lmax digital. The number one institutional crypto exchange. They offer clients the deepest pool of
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Only. Good morning. Everyone. Bang Bang.
Algorithmic stable coins illicit intellectual curiosity from people across disciplines whether you are coming from the technology industry Finance or Academia, creating a digital currency that holds stable value without being pegged to another asset is a fascinating problem. The value of this type of asset is obvious but no one has been able to figure it out. In November Ryan Clements published a paper titled. Built to fail, the inherent fragility of algorithmic, stable coins, where he argued the following quote. Algorithmic stable coins are
currently fragile, these uncollateralized digital assets which attempt to Peg the price of a reference asset using Financial engineering algorithms and Market incentives are not stable at all. But exist in a state of Perpetual vulnerability, iterations to date. Have struggled to maintain a stable Peg and some
have failed
catastrophically. This article argues that algorithmic stable coins are fundamentally flawed because they rely on three factors, which history has shown to be impossible, to control. First. They require a support level of
Man for operational. Stability. S, they rely on Independent actors with Market incentives to perform price stabilizing Arbitrage. And finally, they require reliable price information at all times. None of these factors are certain and all of them have proven to be historically, tenuous in the context of financial crisis or periods of extreme volatility and quote. So this is important context because there's an experiment underway in crypto, that is worth paying attention to Tara is undergoing a transition from a doll.
Slurp egg stable coin to a Bitcoin back stable coin. There's a lot to unpack here. So let's start from the top Tara is described as a public blockchain protocol deploying a suite of algorithmic decentralized, stable coins, which underpin a thriving, ecosystem, that brings defy to the masses. The stable coin at the heart of this ecosystem, Tara USD, or UST as it's known since at more than fifteen billion dollars in market cap. This is the fourth-largest able coin in the market behind tether.
And finance USD, based on a recent conversation with members of the terror Community. There's approximately 100 million to two hundred million dollars of new demand for us tea per day. Not only is UST large, but it is growing quickly to the other asset that you need to know about is Luna. This is the native staking token to the Tara ecosystem. The purpose of Luna is to absorb the price, volatility of the Fiat Peg stable coins along with use in
Governance Mining. And staking a simple framework to evaluate Luna. Is that the more terror is used, the more Luna is worth. So here's how you st gets created. Today. If someone wants UST, they have to burn Luna for every $1 of UST that the person seeks. If the burn one dollar of Luna, this burn mechanism is similar to a stock buyback. It contracts, the supply of Luna and is used as a mechanism to keep UST pegged to the u.s.
Dollar at the preset value of $1. This is obviously not a simple mechanism though and the complexity can create significant challenges. Many of these challenges were highlighted in Ryan Clements paper that we talked about at the start of this letter. So what is Tara going to do differently with UST moving forward? They're going to back UST with Bitcoin. There's approximately three billion dollars in Bitcoin tether and Luna sitting in the Luna Foundation reserves today. They are slowly converting the
we of this into Bitcoin. As for new issuance. The Terra team will refrain from having Market participants burn. A hundred percent of their Luna when they see qst. Instead Tara may burn 60% Aluna and use 40% to purchase Bitcoin. Here's an example, if I want $10 of UST stable coin instead of burning $10 of Luna. I may have six dollars of Luna burnt and four dollars would be used to purchase Bitcoin this dual strategy.
Begins to slowly. Add a Bitcoin, backing to the UST stable coin that is in circulation. The math shows that UST won't be 100% back by Bitcoin. Initially. The idea is that over time Bitcoins, price will continue to rise and will eventually pull in line with the outstanding value of UST. There is a strong likelihood that the Bitcoin backing will actually exceed the UST value over a long enough time line. So what are the ramifications of this decision by Tara first?
Oh Tara's becoming a persistent buyer of Bitcoin. They are slowly purchasing three billion dollars of Bitcoin from the Luna Foundation reserves today. This is being done via aggressive buying on price dips. Tara will then be a daily persistent buyer of Bitcoin. Based on the new issuance mechanism that I just described. You can think of Tara as new demand for Bitcoin. They'll be measured in tens of millions of dollars per day to start.
S, Tara is highlighting the opportunity for Bitcoin backed assets. Tara's do Quan has recently discussed at length. His belief that Bitcoin is pristine collateral. It is the hardest most decentralized asset in the world. The move to back UST with Bitcoin creates a symbiotic relationship, which allows UST to have confidence. That the asset is backed by the most Superior collateral.
Third, Bitcoin gets a credible layer 2 and Tara, one of the largest smart contract Platforms in the world. There's a lot of conversation around what Bitcoin can and cannot do. But now it's becoming obvious that Bitcoins role as pristine collateral opens a world of possibilities. Now, this evolution of Terra n Bitcoins role as collateral doesn't come without risk. The team at Tara has identified the biggest risk being a successful bridge between Bitcoin and their ecosystem. The security model for bridging Bitcoin to a
System with lots of users is still unproven. Many people will point to wrapped Bitcoin as a successful answer, but the process of wrapping Bitcoin in its current form eliminates, the decentralized elements of Bitcoin. So this isn't a true Bridge from Bitcoin to a decentralized ecosystem. Lastly, Tara is pioneering an idea of Bitcoin back currencies. That bitcoiners have long discussed. If you think of the u.s. Dollar, there has been no underlying commodity backing the currency. Once we went off the gold standard, the gold bugs. Think
We'll return to the gold standard but that seems hard to Fathom. Some bitcoiners believe we use Bitcoin. As the next Global Reserve currency including Bitcoin, denominated goods and services. Bitcoin has the only currency and failure of all existing Fiat currencies while the bitcoiners may or may not be right about hyper Bitcoin ization. It is easy to see a world where Fiat currencies continue to exist, but they are simply backed by Bitcoin. This would be a replication of the gold standard, but using digital gold instead of the analog version.
Regardless of how the situation unfolds Tara's moved to back UST with Bitcoin is worth paying attention to. There are lots of risks. But if they are successful in pulling this off, then they will be creating a playbook for other stable coins. End or central banks to follow Bitcoin is a decentralized digital currency that has successfully achieved the properties necessary to serve a superior collateral as more people recognize this achievement. I would anticipate many other assets to adopt the Bitcoin standard Bitcoin backed assets, are
I mean, it just may not be in the form that you previously thought. I hope each of you has a great day and I'll talk to everyone tomorrow. Thanks so much for listening to
today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple Spotify or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered head over to Palm scripto course.com. We've developed a curriculum with the top teams across the industry. It's a three week intensive training program with over 50 events.
It's packed into that three week time, period, go to Palm scripto, course.com to learn more, and I'll meet you guys for the next episode.
