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Eterna's Insights - May 2022

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The Collapse of Terra

The month of May was detrimental to all markets. The S&P 500 officially entered a bear market as it was down 20% from its last peak. The crypto market turned chaotic when the negative market conditions were compounded with a significant industry specific event – the collapse of the Terra blockchain and its associated digital asset LUNA and native stablecoin UST. The collapse was caused by a design flaw. UST is meant to be pegged to $1, and this is supported by collateral which is sold when needed to push the UST price back to $1. A significant de-peg event resulted in a fire-sale of the collateral such that the de-peg still remained and market confidence disappeared while all collateral to support the peg had been sold. The wider crypto market was pulled in to the situation as the collateral held included Bitcoin and other cryptocurrencies, so the fire-sale added to the downward pressure as well as shaking the market’s overall confidence – resulting in $60 billion being wiped off the crypto market in a few days.

Eterna Capital has not been directly exposed to the Terra event and didn’t hold any LUNA or UST. While there has been significant collateral damage caused by the incident, we believe it is a healthy step forward for the industry. In these early days, there will continue be experimentation with new business models – as we move through market cycles it is important that vulnerabilities are found and removed so that the foundations that remain are strong, tested and built to support the economy that we believe will emerge on Web3.

Acceleration of Regulation

The decline of Terra has sparked regulators to speed up regulation of the industry. US regulators have used the incident to push for stricter rules around stablecoins and their issuers. Janet Yellen announced plans to develop a consistent federal framework for stablecoins to address risks to financial stability. G7 finance ministers and central bank governors have called for swift and comprehensive regulation of crypto assets following the crash of Terra. The UK government initially stated that it intends to create legislation to regulate stablecoins. The plan would involve legalizing fully backed stablecoins and not algorithmic stablecoins. Following the Terra collapse, the UK government further published a consultation paper that outlined a strategy to reduce risk for investors holding stablecoins.

NFTs, NFTs, and NFTs

On a more positive note, it has been a great month for NFT adoption by major tech companies. Instagram announced that it has started testing NFTs with select creators in the US. Those who are part of the test will be able to share the NFTs they have made or bought through their main Instagram feed, stories, or messages. Spotify has also been testing a way for artists to display their NFT collections. The test has been rolled out for android users in the US and currently includes NFT previews for artists like Steve Aoki and The Wombats. Robinhood also announced plans to build a Web3 wallet. The wallet will enable users to hold and store their NFTs as well as connect them to online marketplaces. In addition, the wallet will enable users to hold keys for their own crypto, earn yield and trade or swap crypto, without network fees.

The Ups and Downs of Coinbase

It has been an eventful month for Coinbase. With the turmoil in the crypto market, they released disappointing quarterly results. On a more positive note, Coinbase became the first crypto company to enter the Fortune 500. It also rolled out Web3 application functionality, which includes a hot wallet and browser for a limited set of its mobile app users. This will allow users to access Dapps on the Ethereum network such as Uniswap and OpenSea.

Old Meets New

Nomura announced plans to launch a crypto subsidiary to give institutions access to digital assets. The new unit will offer exposure to cryptocurrencies, DeFi, and NFTs. This comes after they recently completed their first crypto derivatives trade. Swiss Bank, Julius Baer, announced that it is creating a proprietary digital wealth management system focused on Bitcoin and other cryptocurrency products for high-net-worth individuals.

Space and Diamonds

Lockheed Martin and the Filecoin Foundation announced that they will begin exploring hosting blockchain nodes in space. They plan to identify a satellite or other space faring platform that can hold technology to operate an Interplanetary File System node. The goal is to reduce latency when downloading data from remote locations. They are aiming for a test mission by August 2022. De Beers, the global diamond mining firm, launched a blockchain-powered platform called Tracr to manage its diamond production and distribution. The system will trace, record, and manage its diamond mining, production, and distribution across the globe. The platform will give industry producers and retailers access to tamper proof records of a diamonds provenance.


Disclaimer: this newsletter was put together for informational purposes only based on our review and analysis. This should not be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment or engage in any transaction.

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