The Challenge in the Derivatives Market?

The demise of the Terra blockchain sent a ripple effect throughout the crypto ecosystem last week, as the market absorbed over 80,000 BTC deployed in a failed attempt to keep the UST "stablecoin" pegged 1:1 with the US dollar.

“If you’re a market maker and you don’t make money in those kinds of days, then yeah — you’re doing something wrong,” said Evgeny Gaevoy, CEO of Wintermute — an algorithmic crypto market maker with nearly $2 trillion in cumulative volume, according to the firm’s website.

In this episode of The Scoop, Evgeny Gaevoy recounts the Terra meltdown from a market maker’s perspective, and explains how future decentralized yield-bearing stablecoins can innovate where Terra's UST failed.

According to Gaevoy, the 20% annualized yield promised to users who deposited UST into Terra’s Anchor Protocol was more debt than could be paid by the protocol’s revenue:

“What was really wrong about LUNA is they had that 20% yield which was coming out of nowhere,” he said. “It was backed by future growth of the protocol, which could have happened, but didn’t.”

Although UST has proven to be a failure, Gaevoy thinks an interest-bearing stablecoin is possible, as long as the promised yield is equivalent to the issuing protocol’s revenue. 

To illustrate, Gaevoy proposed a hypothetical protocol that brings in $500,000 a year in revenue and seeks to raise $5 million through offering interest-bearing stablecoins:

“Let's say they have cash flows of $500,000 per year — they can issue $5 million worth of stablecoins with 10% yield, and then suddenly they have $5 million and they can pay this yield because they actually generate this income. So they can offset these interest payments with what they generate from their own protocol — that model can work, and that model I think is really interesting to explore for a lot of protocols.”

Wintermute is in the process of launching its own stablecoin, according to Gaevoy, who said the firm “just needs to iron out the regulatory details.”

Episode 43 of Season 4 of The Scoop was recorded remotely with The Block’s Frank Chaparro and Evgeny Gaevoy, CEO of Wintermute.

Listen below, and subscribe to The Scoop on Apple, Spotify, Google Podcasts, Stitcher or wherever you listen to podcasts. Email feedback and revision requests to podcast@theblockcrypto.com.

This episode is brought to you by our sponsors Fireblocks, Coinbase Prime & Cross River

Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Fireblocks enables exchanges, lending desks, custodians, banks, trading desks, and hedge funds to securely scale digital asset operations through the Fireblocks Network and MPC-based Wallet Infrastructure. Fireblocks serves over 725 financial institutions, has secured the transfer of over $1.5 trillion in digital assets, and has a unique insurance policy that covers assets in storage & transit. For more information, please visit www.fireblocks.com.

About Coinbase Prime

Coinbase Prime is an integrated solution that provides institutional investors with an advanced trading platform, secure custody, and prime services to manage all their crypto assets in one place. Coinbase Prime fully integrates crypto trading and custody on a single platform, and gives clients the best all-in pricing in their network using their proprietary Smart Order Router and algorithmic execution. For more information, visit www.coinbase.com/prime.

About Cross River

Cross River is powering today’s most innovative crypto companies, with banking and payments solutions you can rely on, including fiat on/off ramp solutions. Whether you are a crypto exchange, NFT marketplace, or wallet, Cross River’s API-based, all-in-one platform enables banking as a service, ACH & wire transfers, push-to-card disbursements, real-time payments, and virtual accounts and subledgers. Request your fiat on/off ramp solution now at crossriver.com/crypto.