This cryptocurrency just sold a billion coins to avoid a “Black Swan” event.

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In this video clip from “The Crypto Show” onwards Live motley fool, recorded on February 23Fool contributors Jon Quast and Travis Hoium discuss the public blockchain protocol Land (MOON -3.50% ) and its recent sale to avoid a very rare event with significant consequences.

Jon Quast: What’s so interesting here is the real-world utility. What is that? It is the stable currency, TerraUSD. This should always be worth one US dollar. What’s the benefit? Why not just use a dollar? Well, if you’re using a dollar online, credit card purchases will likely be hit with a 3% fee. Conversely, TerraUSD can reduce it to less than 1%. There is an incentive here to use this currency, especially if it can be a stable currency.

The way it does it, the way it keeps it unreserved is that it has this other coin called LUNA. Since the value of a TerraUSD deviates from $ 1, you can switch back and forth from LUNA. New coins are burned and created in the process, and what it does is adjust TerraUSD’s supply and demand so that supply is always in line with demand so that the price is at one dollar, which really is. Interestingly, it has worked so far over time. What is happening? The founders are talking about it here, we are worried, we are aware of the possibility of a “black swan” event. You know that term, Travis, right?

Travis Hoium: Yes. Really an anomalous event.

Almost: I believe the term was coined by Nassim Nicholas Taleb, the author of Antifragilealso author of Black Swan. I believe he coined the term. Basically, it is a very rare event with significant consequences. I think we can sum it up like this. There are scenarios. Let’s say the entire cryptocurrency market is simply booming.

For whatever reason, something happens and there is not a single currency in circulation, they are all falling double digits in a short amount of time, in that scenario, there is theoretically an arbitrage opportunity for TerraUSD, but no one is willing. to take advantage of this opportunity because the whole cryptocurrency world is falling apart. In that scenario, the stable currency will lose its anchor and, in doing so, confidence in the whole system will be lost. If it can’t keep that dollar peg, then no one will have the incentive to use it.

This has never happened so far, but it could theoretically happen. The founder is here saying, “You know what, we have some reserves on hand that we can deploy to remedy the situation if this situation occurs in a million.” Just what they were able to do, they were able to sell one billion LUNA tokens. Now, if you own LUNA tokens, it probably sounds a little creepy because suddenly there are all these tokens out there held by these private investors.

Well, they are required to keep them for a four year vesting period. Not only will they go ahead and dump them on the market by raising the price of LUNA, this has a time element in place. There is time for the entire ecosystem to grow here. With this billion dollars, the LUNA Foundation Guard of Earth will buy Bitcoin (BTC -1.46% ) and other altcoins and keep them in reserves.

They are fundamentally different from the government-backed currency of the US dollar. The thought process here is if we have one of these anomalous events, we will have funds that will be diversified and ready to use to maintain confidence in the system and in TerraUSD at one dollar.

I have: My question for this is whether the black swan event is that there is a related sale in all of these digital crypto assets and your answer is to buy assets that would also be related to that sale. It seems a bit strange to me.

The argument here, I think from their point of view would be that Bitcoin is a hedge. But we’ve seen over the past six months that Bitcoin is really trading more as a high-risk asset than a growing stock as the board should be. Inflation is rising, Bitcoin’s value is falling. If it were a hedge, we should see the opposite happen.

Similarly, this is what the 2008-2009 financial crisis taught us, was that you own the bonds instead of all the stocks, but the stocks were down and the bonds were down. There was no safe place, there was no unrelated resource. I think it’s just an interesting thing to point out with this, which I understand why they think it would be a good hedge or backstop, but if Bitcoin drops from where it is today to $ 5,000 then I don’t see how it responds to the problem at the end of the day.

Almost: I think that’s really fair, Travis. To be honest with you, I don’t know if they are thinking of other black swan scenarios in this one as well. The reasoning, the topic that I have read is that the entire cryptocurrency market is booming, and this is the black swan event we are hiding for. I don’t know if they have any others in mind because, in your opinion, this sounds a bit like circular reasoning.

If the whole thing is falling apart, then Bitcoin itself wouldn’t be sinking. I think it’s really fair. I guess at the same time, Bitcoin probably wouldn’t be worth zero. They would still have some firepower to work with to get their peg back in order, but it’s an interesting and well-taken point there.

I have: Their responses to regulators have been interesting as regulators try to investigate what they are doing and how they are pegging against other stable currencies.

This article represents the author’s opinion, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis, even one of our own, helps all of us think critically about investing and make decisions that help us become smarter, happier, and richer.

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