#877 The $10 Billion Bitcoin Bet On Stablecoins

This episode is a little different than the usual podcast format. There is no guest. Instead, I will share a couple of thoughts I have around a specific topic. Today I discuss Terra and USTs plans to back their stablecoins with Bitcoin. ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. ======================= The world's 2nd largest crypto exchange, OKEx, has dropped the "E" to become OKX, reflecting its evolution from a traditional crypto exchange to a comprehensive, cross-platform crypto services provider. With OKX's decentralized platform and Web3 wallet, MetaX, you have full custody over your crypto. Explore DeFi, NFTs and play-to-earning gaming with the world's most powerful crypto exchange. Visit OKX.com to learn more. =======================

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Today's episode is about a $10 billion Bitcoin bet on stable coins. We dive into Terra and UST's plans to back their stablecoin 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 crypto liquidity on the planet, underscored by 100% uptime track record through volatility spikes. They leverage LMAX Group's liquidity relationships and ultra-low latency technology. LMAX Digital is the market-leading solution for institutional

• 0:44Anthony Pompliano?

  crypto trading and custodial services. If you've never heard of LMAX Digital, it's probably because you're not an institution. They have no retail, only institutions. They feature a sentential limit order book streaming spot Bitcoin, Ether, Litecoin, and Bitcoin Cash, all paired with US Dollars, Euro, and Yen. LMAX Digital, they're secure, they're liquid, and they're trusted. Learn more at LMAXdigital.com/pomp. Again, LMAXdigital.com/pomp. This episode is brought to you by Eight Sleep. Eight Sleep is the single best product that I have purchased over the last three years. It completely changed my life. I'm not joking, pay attention. The Pod Pro cover, which goes over your mattress by Eight Sleep, is the

• 1:26Anthony Pompliano?

  most advanced solution on the market for thermal regulation. It pairs dynamic cooling and heating with biometric tracking. You can go to eightsleep.com/pomp to check out the Pod Pro cover, and you save $150 at checkout. They currently ship within the United States, Canada, and the UK. Now I told you, it changed my life. It helps me sleep deeper, helps me sleep longer. I feel much more refreshed, and I have better energy. You want to know how I have relentless energy every single day? Because I sleep on an Eight Sleep. Seriously, go check it out, eightsleep.com/pomp today. This episode is brought to you by OKX. OKEX has dropped the E to become OKX. Founded in 2017 with a mission to deliver a cutting-edge crypto trading experience, OKX, the world's second

• 2:10Anthony Pompliano?

  And largest crypto exchange by trading volume has since expanded its scope alongside the wider industry, adding features from all corners of crypto. If EX is about exchange, X is about intersections. Cross-chain, cross-functional, cross-platform, an interoperable future that's not siloed into isolated platforms and blockchains. The name change and the new look and feel represent OKX's ongoing move towards decentralized finance. With OKX's decentralized platform and Web3 wallet, MetaX, you have full custody over your crypto. Connect MetaX in your browser or within the OKX app to explore DeFi, NFTs, and play to earning gaming with the world's most powerful crypto exchange.

• 2:52Anthony Pompliano?

  Whether you're just learning about crypto, you're a seasoned DeFi DJ, an NFT enthusiast, or a pro trader, you're all invited to a better future. Go check it out today and let me know what you think. All right, let's get into this episode. I hope you guys enjoy this one.

• 3:07Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:30Anthony Pompliano?

  Good morning, everyone. Bang, bang. Algorithmic stablecoins elicit 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 Stablecoins," where he argued the following. Quote, "Algorithmic stablecoins are inherently 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.

• 4:15Anthony Pompliano?

  Iterations to date have struggled to maintain a stable peg, and some have failed catastrophically." This article argues that algorithmic stablecoins 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 demand for operational stability. Second, 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. End quote. So this is important context, because there's an experiment underway in crypto that is worth paying attention to.

• 4:59Anthony Pompliano?

  Terra is undergoing a transition from a dollar-peged stablecoin to a Bitcoin-backed stablecoin. There's a lot to unpack here, so let's start from the top. Terra is described as a public blockchain protocol deploying a suite of algorithmic, decentralized stablecoins, which underpin a thriving ecosystem that brings DeFi to the masses. The stablecoin at the heart of this ecosystem, Terra USD, or UST as it's known, sits at more than $15 billion in market cap. This is the fourth-largest stablecoin in the market, behind Tether, USDC, and Binance USD. Based on a recent conversation with members of the Terra community, there's approximately $100 million to $200 million of new demand for UST per day.

• 5:43Anthony Pompliano?

  Not only is UST large, but it is growing quickly, too. The other asset that you need to know about is Luna. This is the native staking token to the Terra ecosystem. The purpose of Luna is to absorb the price volatility of the fiat-peged stablecoins, along with use in governance, mining, and staking. A simple framework to evaluate Luna is that the more Terra is used, the more Luna is worth. So here's how UST gets created today. If someone wants UST, they have to burn Luna. For every $1 of UST that the person seeks, they have to burn $1 of Luna. This burn mechanism is similar to a stock buyback.

• 6:26Anthony Pompliano?

  It contracts the supply of Luna and is used as a mechanism to keep UST pegged to the US 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 Clement's paper that we talked about at the start of this letter. So what is Terra going to do differently with UST moving forward? They're going to back UST with Bitcoin. There's approximately $3 billion in Bitcoin, Tether, and Luna sitting in the Luna Foundation reserves today. They are slowly converting the majority of this into Bitcoin. As for new issuance, the Terra team will refrain from having market participants burn

• 7:09Anthony Pompliano?

  100% of their Luna when they seek UST. Instead, Terra may burn 60% of the Luna and use 40% to purchase Bitcoin. Here's an example. If I want $10 of UST stablecoin, instead of burning $10 of Luna, I may have $6 of Luna burnt and $4 would be used to purchase Bitcoin. This dual strategy begins to slowly add a Bitcoin backing to the UST stablecoin that is in circulation. The math shows that UST won't be 100% backed by Bitcoin initially. The idea is that over time Bitcoin's price will continue to rise and will eventually pull in line with the outstanding value of UST.

• 7:51Anthony Pompliano?

  There's a strong likelihood that the Bitcoin backing will actually exceed the UST value over a long enough timeline. So what are the ramifications of this decision by Terra? First, Terra is becoming a persistent buyer of Bitcoin. They are slowly purchasing $3 billion of Bitcoin from the Luna Foundation reserves today. This is being done via aggressive buying on price dips. Terra will then be a daily persistent buyer of Bitcoin based on the new issuance mechanism that I just described. You can think of Terra as new demand for Bitcoin that will be measured in tens of millions of dollars per day to start. Second, Terra is highlighting the opportunity for Bitcoin-backed assets.

• 8:34Anthony Pompliano?

  Terra's Do Kwon 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 two in Terra, 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 Bitcoin's role as pristine collateral opens a world of possibilities. Now, this evolution of Terra and Bitcoin's role as collateral doesn't come without risk. The team at Terra has identified the biggest risk being a successful

• 9:19Anthony Pompliano?

  bridge between Bitcoin and their ecosystem. The security model for bridging Bitcoin to a large 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, Terra is pioneering an idea of Bitcoin-backed currencies that Bitcoiners have long discussed. If you think of the US dollar, there has been no underlying commodity backing the currency once we went off the gold standard. The gold bugs think we will return to the gold standard, but that seems hard to fathom. Some Bitcoiners believe we will use Bitcoin as the next global reserve currency, including Bitcoin-denominated

• 10:02Anthony Pompliano?

  goods and services, Bitcoin as the only currency, and failure of all existing fiat currencies. While the Bitcoiners may or may not be right about hyper Bitcoinization, 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, Terra's move 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 stablecoins and/or central banks to follow. Bitcoin is a decentralized digital currency that has successfully achieved the properties necessary to service superior collateral. As more people recognize this

• 10:47Anthony Pompliano?

  achievement, I would anticipate many other assets to adopt the Bitcoin standard. Bitcoin-backed assets are coming. 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 subscribe 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 pompscryptocourse.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 packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.