Terra is unique in that it is a layer 1 protocol for algorithmic stablecoins which can imitate the price of fiat currencies without being backed by fiat.
But the idea is that this last resort will alleviate the stress in the market and dramatically halt an accelerating selloff that would be characteristic of a true death spiral event.
Therefore, Terra stablecoins are functionally backed by the utility of LUNA as the native coin of the Terra blockchain but will also be protected by the value of Bitcoin.
The next step is thinking through whether a Bitcoin standard of sorts will be used by governments and central banks, as if bridging traditional and decentralized finance within the global monetary system.
By 1945, the US had most of the world’s gold because it had been paid by the other countries in gold for the first two World Wars.
However, central banks still have gold reserves—about a fifth of all gold ever mined are held by central banks—along with foreign currencies and other precious metals.
And it happens that gold and silver has beaten out most other materials in fulfilling these criteria, and that gold beats silver.
A hard fork involving a majority of users agreeing to the change is required to change this supply ceiling.
Today, there are too many ways to “observe” that people increasingly rely on narratives to shape their understanding of reality, and by extension their thoughts and actions.
If there is already the narrative that governments’ tendency towards control creates the need for a decentralized currency, then a widespread crackdown in the West will only strengthen this point.
Anyone who does a little research will discover that those who own Bitcoin became victims of the autocratic monetary control they were trying to protect themselves against.
Recently, Bitcoin critics have turned to raising environmental concerns related to mining, but this is an argument which can apply to the limitless amounts of environmental hazards that a ban predicated on this would be regarded as unfounded.
The only narrative left for democratic governments is to show that they do not mind Bitcoin and will try to adopt it.
Past a certain threshold of Bitcoin’s publicity, this move will even be regarded as “innovative” and “bold” by the public, and the political party which implements it will be praised.
Bitcoin’s high network fees makes it hard to compete with centralized payment services, so it is unlikely to supplant fiat as a medium of exchange, much like how no one uses gold coins for transactions.
I believe they will find that there is no better way to “control” Bitcoin than by buying and locking much of it in an on-chain address while clarifying the auditing standards of out-of-vault Bitcoin transactions for tax purposes.
And having Bitcoin, the model of decentralization, backed CBDCs severely weakens the narrative that CBDCs are a way for governments to increase their control.
Bitcoin will probably not replace gold, but gold’s valuation as a function of the global monetary base is useful in estimating a reasonable Bitcoin valuation.
If gold has held its place in central bank reserves, it seems inevitable that the move by governments will be to adopt Bitcoin under a similar use case.
I explain here that BITO is now a good way to track Bitcoin because the contango in Bitcoin futures have subsided due to the ease of arbitrage between the spot and future markets.
Bitcoin is obviously very volatile and has no chance of generating intermittent cash flows, so allocation should not exceed what one would have in commodities.
Disclosure: I/we have a beneficial long position in the shares of GBTC, BITO either through stock ownership, options, or other derivatives.