The collapse of the Crypto-currency exchange rates this month – even those that should not fall

Usually, no one will blink an eye if the rate of a crypto-currency is falling by 30% per week. This is, after all, the Wild West.

But when this happened to the DAI coin this month, the market got nervous, because the token was primarily developed as a stable system linked to the US dollar.

DAI – one of the crypto-currencies, known now as “stable coins” (let’s call them so). They are designed so that the supply of currency changes, adjusting to the changes in the market, and new tokens were issued when the price increases, and bought out when it falls. Such efforts should together lead the course of such a token to stability.

Stable coins, or, as they are sometimes called, the “holy crypto-currency Grail”, are advertised as a way to strengthen commercial demand for blockchain, because many enterprises avoid this industry, fearing high volatility.

An example is that more and more decentralized applications (Dapps) rely fundamentally on the Ethereum and their internal tokens, also dependent on it. These mechanisms serve as means of payment within applications. So, it’s worth it to change radically to the Ethereum, the system will start chaos.

Users of such applications will not spend tokens if they expect a doubling of their price for the next day; However, if they suspect that the coin is waiting for the collapse of the course, they will not use the system at all.

For this reason, Rune Christensen, the founder of MakerDAO, the company that created the DAI stabilization in December, said:

“The so-called stable coins are the first step on the way to something really interesting. I believe that the reason for the cautiousness of the world in relation to the blockchain is basically that no one will simply not be able to do business in an unstable environment. ”

In the context of the search for stability, the interest in honing the technology of stable coins is likely to increase in 2018.

In October, a group of well-known investors, including Andreessen Horowitz and Pantera Capital, supported the “Basecoin” project, designed to support the stability of the course. But this is not all: according to representatives of CoinDesk, many more such projects are under development.

In addition, the popularity of BitCNY in China – a token tied to the renminbi and completely replacing the latter in exchange-traded crypto-exchange trades, as Chinese laws restrict the exchange of traditional currency cryptocurrency – led Christensen to the decision to call stability the “best samples of technology at the blockchain at the moment.”

However, critics believe that the short period of fixing the DAI rate at around 72 cents only foreshadows the impending catastrophe that the market has already seen several times.

Unfavorable beginning

Although the stable coins foreshadow bidding of tens of billions of dollars a day, many enthusiasts have already described the technology as a “total failure” for the entire crypto-currency industry.

Preston Byrne, an independent consultant and former chief operating officer and legal advisor of MonaxIndustries, even described the stability as “one continuous idiocy of universal proportions”, making a reference to the Thracian Furious Zhukotrepach, a character in the series of books “The Hitchhiker’s Guide to the Galaxy.”

And this criticism has grounds.

Perhaps, the most famous of the stable coins is USDT, on some of the largest crypto-exchange markets it acts as a substitute for the dollar. Although this function seems to justify the existence of a token, the development company Tether Limited has faced conflicting estimates of its product.

For example, last year, the Tether Limited fund was allegedly robbed of a sum equivalent to $ 30 million in a fiat equivalent.

And on the wave of recent accusations, tough ties between Tether Limited and the Bitfinex exchange have been severely criticized.

Tether, which was tied to the dollar, appeared on the market already in 2014 (formerly under the name Realcoin), but only in 2015, Bitfinex opened the door for Tether, being under pressure due to the loss of licenses for conducting banking operations (and losing the opportunity to transfer the traditional currency) .

This led the USDT to takeoff, and now the token is often seen as a substitute for traditional banking services because it allows users to quickly withdraw and accrue amounts of dollars.

But since then much attention has been focused on the close ties between Bitfinex and Tether (companies have a common property under management), accusations of negligent management have been made. Some of the prosecutors, especially the blogger under the pseudonym “Bitfinexed”, have reached the point that they claim that the USDT is not backed up and is only massively thrown into the market in order to increase the bitcoin rate.

In an interview with CoinDesk, the Tether spokesman said: “From the very beginning, we laid the same principles in Bitfinex and Tether-it was never a secret. Accusations that the USDT is not secured by anything, are groundless. Tether provides its cryptocurrency up to the last dollar. ”

In December, representatives of both companies said that the upcoming audit would prove the full security of the tokens. In addition, they threatened online critics of the company with lawsuits.

Similar problems were also pursued by NuShares after the startup launched its own stable coins in 2016.

Despite the fact that the project provided for maintaining the stability of the exchange rate through economic incentives, a wave of break-ins and alleged fraud with a token tied to the interesting structures dropped the rate of stable coins to 10 cents.

At that time, leading developer NuBits Jordan Lee dumped blunders on “suicidal tendencies” in the crypto-currency community.

Small amounts, large errors

Similarly, critics often recall the freezing of BitUSD trades, perhaps the very first stable coins. Trades were suspended in 2014 by the BitShares exchange after the vulnerability was discovered in the token code.

Surprisingly, over the past four years, BitUSD has largely retained its positions, although it is still considered “for the most part” problematic.

Last week, BitUSD, according to CoinMarketCap, reached a mark of 1.10 dollars per token. Such a small deviation course can encourage traders to take advantage of them.

Rune Christensen said about this: “If you buy DAI just below one dollar and sell a little higher, then in a market expressed in dollars, for you it’s just a great way without effort to cash in on the imperfections of the system.”

Nevertheless, Christensen explained that the tiny price fluctuations that the stability indicators show on CoinMarketCap do not affect the exchange rate of tokens on individual exchanges.

“Rather, because of the algorithms of CoinMarketCap, calculating the average price of the cryptocurrency, there will always be a volatility effect that is noticeable on the price charts,” he said.

He does not see the point in saying that the technology does not work just because a couple of inconsistencies have happened because today the stable coins have already successfully occupied their niche in the market.

“BitUSD is one of the first really successful examples of smart contracts, 2.0 blockchain technology that works great, and in particular, it brings real benefits to the world, as no other blockchain does,” Christensen said.

Immature infrastructure

Nevertheless, according to Christensen, the discrepancy between the data of CoinMarketCap and the exchanges where DAI is traded is not guilty of the fall of the token last week.

These price fluctuations, as Christensen suggested, were more likely due to the fact that the trading bot accidentally indexed the Chinese Bibox stock exchange. Following him, another bot has started indexing new data based on the erroneous ones. This point of view is confirmed by the fact that the Gatecoin DAI exchange trades for $ 1.10, and on Bibox – for only 72 cents.

Such volatility frightens the world’s enthusiasts of crypto-currencies, concerned about the possibility of a global collapse. In such scenarios, the price of an asset that ensures stability, pulling it down after itself, and then the whole multibillion-dollar market, is crippled.

But as technology evolves, developers embed in their projects various precautions

For example, the MakerDAO team announced the mitigation of the probability of a price storm through the diversification of assets, providing a new version of DAI, coming out this summer.

“Thus,” Christensen said, “the collapse of the exchange rate is very unlikely and can occur only in conditions of extreme negligence, with the proper arrangement of assets, it can theoretically be prevented with a probability of 99.9%.”

But all such structures seem to prove that the technology and the infrastructure surrounding it are still so young that it’s worth waiting for the turmoil.

“Indeed, the young markets for stability, of course, do not quite fit,” Christensen said.

He compared the fall of DAI to the collapse of the price of BitUSD after the launch of the latter, explaining that before stable products are widely sold on the market, they must go through a stage of vulnerability for bots and errors.

As Andi Milenius, the developer of MakerDAO, told CoinDesk: “If the volume of DAI’s turnover is tens of millions of tokens, and the price will remain volatile, that’s when there will be something to talk about.”

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