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During Rio Crypto Day 2022, executives said that fiat-currency-backed stablecoins are a gateway to the crypto market and can be the means for the segment’s consolidation. Crypto assets, such as BRZ, USDC, and USDT, have proven themselves during the Earth/Luna meltdown over the past 45 days.

“Stablecoin is the basis for interacting in the Web 3.0 environment”, said Carlos Eduardo Russo, CFO of Transfero, during Rio Crypto Day. Such crypto assets give the public more security in financial transactions, thus helping the transition to the blockchain environment.

By giving this resource base, stablecoin brings security to new investors and guarantees crypto liquidity in the “real market”. In the opinion of the educational manager of Órama Investimentos, Gilvan Bueno, the big challenge of crypto assets is to get into people’s daily lives. “The more they use the platform, the more wealth it will generate. For such purpose, it needs to democratize and reach everyone”, said Bueno at the event.

Multiplier Effect

In the DeFi world, stablecoins backed by currencies are seen as a safer asset to create liquidity pools, as explained by Caio Vicentino, MakerDAO’s ambassador in Brazil. At the Rio Crypto Day, Vicentino pointed out the many ways users can use DeFi to make crypto assets pay off and emphasized efficiency.

“Efficiency is the fundamental concept of crypto assets. It is efficiency that makes this ecosystem gain scale and value faster than the traditional financial system”, Vicentino commented.

Russo pointed out that the issuance of dollar stablecoins and other currencies already exceeds the issuance of reais in Brazil. For example, US$ 200 billion in stablecoins were issued last year alone.

The Transfero executive also explained the “multiplier effect” of stablecoins on top of collateral. “Every time someone deposits stablecoin on a decentralized platform, and someone borrows it, the money supply is doubled”, Russo said.

The example (of what not to do) of Terra/Luna

Algorithmic stablecoins are still in testing globally and, at least in recent months, have shown considerable weaknesses. The case of the Luna token, which zeroed its value from April to May, is significant for the market to understand how much stablecoins still need to be backed by collateral.

The algorithm, in theory, would work as a factor to balance the supply and demand of the coins, decreasing their volatility. The problem highlighted by what happened with Luna was how it cannot be valued without the collateral. “The coin had no intrinsic value”, explained Transfero’s CFO.

“When we evaluated Luna, you could see no diversification. Basically, all the value there was the asset itself”,  said Leo Jaguaribe, creator of CryptoHolder, during his presentation at Rio Crypto Day 2022. According to Jaguaribe, since it didn’t have full collateral, the response to the targeted attack was that the asset simply had no reserve to guarantee the system.

As much as the fundamentals showed some risk, unlike other stablecoins, the market was still surprised by the “level” of the attack. For Jaguaribe, the perplexity was to see the “project” being zeroed out after a single price shock. Even so, this case only reinforces the need for ballasted stablecoins, such as BRZ or USD Coin. “It’s a lesson that the industry needs to understand, that it’s not easy to make a stablecoin algorithm. The stablecoins seen as centralized are still important for maintaining the crypto ecosystem”, concluded Carlos Eduardo.