The Proliferation of Algorithmic Stablecoins
Hartmann Capital Newsletter, Thursday April 28 2022
We’re back!
After a brief hiatus of our newsletter, we are back to shipping insights, analysis, and alpha to your inbox every week. Since December, Hartmann Capital has more than doubled in size, both in assets and in team, with new hires leaving traditional tier-1 firms to join us from portfolio, to BD, to comms, and accounting. Hartmann Capital has been heads-down on its current 2.0 Roadmap, as we are laying the foundation to dominate the next 10 years of the digital asset & metaverse space.
We hope you enjoy this week’s insights and our brand new podcast! I look forward to reconnecting with some of you as we are opening up our subsequent raise for Hartmann Metaverse Ventures I.
The future belongs to those who invest in it,
Felix Hartmann, Managing Partner
In this Issue:
The Proliferation of Algorithmic Stablecoins
The FED's Intention to Raise Interest Rates
Launch of The Felix Hartmann Show
The Proliferation of Algorithmic Stablecoins
Algorithmic stablecoins have been making a buzz the last few months. Unlike the first stablecoins (Tether and USDC), algorithmic stablecoins are not backed by crypto or fiat currencies, but by algorithms, as the name suggests, that incentivize traders to maintain the price via arbitrage.
Currently, the most popular algorithmic stablecoin is TerraUSD (UST), reported by CoinDesk as the third-largest stablecoin by market cap, following closely after Tether and USDC. Last Monday, CoinGecko recorded about 17.5B TerraUSD in circulation, showing a consistent bloom of the coin's utility.
With how the UST mechanism is designed, its dollar value is built and preserved through a system that relies on traders burning or minting tokens to keep it at a stable price. This process is enabled by UST’s codependent pairing with the Terra blockchain’s network token, Luna. Whenever a UST token is minted, the equivalent of $1 in Luna is burned, and vice-versa.
If the value of UST drops below $1, buyers can burn the coin or stop it from circulating in exchange for a dollar in Luna. This enables a reduced availability of UST tokens, and in turn, increases the price of the token back to peg. In cases where the price of UST surpasses a dollar, traders are encouraged to burn Luna in exchange for a dollar in UST to boost its supply and bring the price back to peg.
This algorithmic balancing method is intended to keep TerraUSD's value at one dollar and has been mostly successful so far. According to CoinMarketCap, since the coin's creation in 2020, it has only meaningfully dropped below a dollar twice. This token design was a boon for both Luna and UST, as in the last quarter of 2021, UST piled up a 260% increase in its market cap.
NEAR and Tron protocol appear to be piggy-backing off Luna’s success, as they are launching their own algorithmic stablecoins.
NEAR has recently sent its stablecoin live on the NEAR public test network. USN, as it is named, will compete with TerraUSD and is rumored to follow a similar mechanism to UST, in which NEAR tokens are burned when users want to mint the stablecoin to spike its demand.
Tron on the other hand will run its USDD stablecoin from May 5. Being an already established network for Tether and its USDT having a market cap of $41.7B compared to Ethereum's $39.8B per reports from CoinMetrics, Tron now wants to build a decentralized Stablecoin that doesn't run on cash, but on algorithms.
Although we are unsure of the stability and longevity of these stablecoins, the NEAR token has retested it's all-time high a second time, even amongst broader market weakness. For Tron, its $10B strategy to provide liquidity in cases of emergencies to stablecoins issued on Tron to keep their value stable even during cases of a financial crisis is a positive catalyst for the token.
The FED’s Intention to Raise Interest Rates
In January, speculations of the Federal Reserve's intent to raise interest rates and taper bond purchases sent the markets into a frenzy. Of course, along with other markets, the Crypto market turned sullen as this would be the first time in 3 years that the FED would increase rates, especially after a long period of easing. This objective was pointed to be in place as a fight against the crippling effects of inflation on consumers and the economy.
While some economists expressed concerns about the FED's lateness in combating inflation, others believed that the FED would act too aggressively. They feared that a continuous rate hike would risk inducing a recession instead of proliferating inflation. When this FED meeting was rolled out and the board had confirmed rumors, Bitcoin had already plowed through its 40k support and fallen sharply.
In March, the US Central Bank started increasing its benchmark rate by 0.25% and hinted at more increases in the coming months. By raising rates, the Fed will make it more difficult for people to borrow and hopes that the demand for goods and services will decrease, and inflation is eased in the process.
Coindesk proposes that this would translate to high demand for stablecoins. After all, the easiest way for non-US individuals to get dollar exposure is via dollar pegged stablecoins. And those are settling on and creating value for many Layer 1 blockchains, predominantly Ethereum and Terra. A further proliferation of stablecoins also increases the total addressable market (TAM) of DeFi products that empower individuals to borrow, lend and exchange stablecoins.
Launch of The Felix Hartmann Show
While we have been taking a pause from our weekly newsletter during Q1 of 2022, we officially launched our new podcast which aims to highlight portfolio founders and thought leaders in the digital asset, metaverse and frontier tech space.
In episode 1, Felix Hartmann sat with Todd Chernecki, CEO and founder of SUBPAC. Todd and Felix discussed where the future of VR audio immersion and gaming is headed at. Watch here.
To uncover the evolution of virtual reality and how it has matured from arcade games to military applications and beyond, Felix speaks to the founder and CEO of Redpill VR, Laurent Scallie, in the second episode of the podcast. Watch here.
The third episode induces a strong conversation with Horizons Law and Consulting founder, Ryón Nixon. This episode discusses the prospects of starting a DAO and uncovers some Crypto laws and Regulations. Watch here.
Tom Shaughnessy of Delphi Digital is on the 4th episode of the podcast and he shares how to build a crypto empire with Felix. The co-founder gives insights into Delphi's growth and impacts so far. Watch here.
Playible's co-founder, Jason Bales, is on the 5th episode of the podcast. He shares details about diving in NFT trading, utilizing NFTs for fantasy sports, and the possibility of fantasy sports as eSports. Watch here.
The latest episode features Mark Yusko of Morgan Creek Capital Management covering a variety of topics from Blockchain tech to the dollar gaining value to political crypto agendas and to the Federal Reserve. Find it here.
Hartmann Capital Weekly written by Communications Lead, Chidinma Divine Iwu, and edited by CIO Felix Hartmann
Disclaimers:
This is not an offering. This is not financial advice. Always do your own research.
Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.
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