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No rules, but only for people like us

Photo by Kevin Schmid on Unsplash

There have been howls of outrage on social media circulating about alleged market manipulation by a well-known hedge fund and large asset manager. The funds have denied involvement, but that has not diffused the situation, which looks a little like a repeat of /r/WSB and Gamestop taking on the “bad guys”.

What was the “crime”?

On the face of it, UST had a mechanism to balance it with LUNA and was positioned as a stablecoin, only unlike MakerDAO’s DAI, which is an algorithmic stablecoin which is battle-tested and is built on over-collateralization with sound margin management, UST was an arbitrage between the debt and equity financing and not an algorithm.

There is a long history of probing pegs, such as the Bretton Woods, Sterling’s ejection from ERM, and it would be naïve to think that stablecoins (or currency pegs) would be exempt.

The activity that knocked UST was a well-executed plan which found the vulnerability and netted a handsome profit. Nothing that was done was illegal, and it was all above board. In some ways, it was not different from the day-to-day activity we see in Decentralised Finance, where there are bots that look for signals and do arbitrage between exchanges, or when someone figures out how to use flash loans to take advantage of an edge case in a smart contract.

The impact on the Terra blockchain and community was huge, and there are questions whether the project is viable. There is no denying how devastating this is for the wider crypto community, but I would doubt that this was malicious or motivated by some deep ideology; it was a simple series of transactions designed to make a profit.

Photo by Aditya Saxena on Unsplash

Decentralized Finance, Liberty, Freedom?

The philosophy of Decentralised Finance and the libertarian narrative of somehow being beyond borders, rules, and regulations would not, at a superficial level, have an issue with market events no matter what the consequences as the principles of “no rules” have been adhered to.

Whether you agree with the “freedom” and “no rules” principles is important. If you do it, then implies you should not mind who is doing what, and everything is permitted. And yet there has been an outcry and conspiracies flying around over what has been seen as the “wrong people” who took advantage of a totally open, unregulated system. There have been critics who state that pure market manipulation is wrong, but is this not a result of an unbound market where market manipulation is not expressly forbidden as that would somehow bring rules into play? There has also been a reference to the offending institutions having an ESG charter, and thus market manipulation somehow breaches their Social covenants that they signed up to.

This smells a bit like “our tribe” of individuals who distrust authority, state, and corporations are free to play in unfettered markets. If the distrusted players bring their money, then that is okay as long as they are providing liquidity and buy “our” tokens (so that they increase in value) but leave the arbitrage and flash loan trading to “us” and do not do anything “clever” like “market manipulation”.

If there are unwritten rules and conventions to crypto, then should these be encapsulated into code? Or is it just part of the landscape to stimulate outrage on social platforms when the unwritten rules and conventions are broken as a community cohesion exercise?

What is the answer?

The simple one is to ignore the social platforms and leave the crypto echo chamber, but there is valuable insight and information as to what is happening in crypto and blockchain which would be missed.

This is an opportunity to move from the “pure” market-driven, no rules environment and develop the frameworks that we are happy with rather than wait for rules to be written centrally “for us”.

Shaping the rules and regulations through good governance and some disclosure will help in making the crypto markets more accessible, less volatile, and a more credible marketplace.

The risks that the regulators ban stablecoins or push the industry into the arms of (licensed) intermediaries are real, and we either work with the regulators to shape the rules and get our house in order or accept what is imposed on us.

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Martin Worner

Martin Worner

Growing Tgrade, a business focussed, public blockchain, which solves real world issues.