Stablecoins

Buterin: How to create algo stablecoins that don’t turn into Ponzis or collapse

“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking,” Vitalik Buterin emphasized.

Ethereum co-founder Vitalik Buterin has shared two thought experiments on how to evaluate whether an algorithmic (algo) stablecoin is sustainable.

Buterin’s comments were sparked by the multi-billion dollar losses caused by the collapse of the Terra ecosystem and its algo stablecoin TerraUSD (UST).

In a Wednesday blog post, Buterin noted that the increased amount of scrutiny placed on crypto and decentralized finance (DeFi) since the Terra crash is “highly welcome,” but he warned against writing off all algo-stablecoins entirely.

“What we need is not stablecoin boosterism or stablecoin doomerism, but rather a return to principles-based thinking,” he said:

“While there are plenty of automated stablecoin designs that are fundamentally flawed and doomed to collapse eventually, and plenty more that can survive theoretically but are highly risky, there are also many stablecoins that are highly robust in theory, and have survived extreme tests of crypto market conditions in practice.”

His blog focused on Reflexer’s fully Ether (ETH)-collateralized RAI stablecoin in particular, which isn’t pegged to the value of fiat currency and relies on algorithms to automatically set an interest rate, proportionally opposing price movements and incentivizing users to return RAI to its target price range.

Buterin stated that it “exemplifies the pure ‘ideal type’ of a collateralized automated stablecoin,” and its structure also gives users an opportunity to extract their liquidity in ETH if faith in the stablecoin crumbles significantly.

The Ethereum co-founder offered two thought experiments to determine if an algorithmic stablecoin is “truly a stable one.”

1: Can the stablecoin ‘wind down’ to zero users?

In Buterin’s view, if the market activity for a stablecoin project “drops to near zero,” users should be able to extract the fair value of their liquidity out of the asset.

Buterin highlighted that UST doesn’t meet this parameter due to its structure in which LUNA, or what he calls a volume coin (volcoin), needs to maintain its price and user demand to keep its United States dollar peg. If the opposite happens, it then almost becomes impossible to avoid a collapse of both assets:

“First, the volcoin price drops. Then, the stablecoin starts to shake. The system attempts to shore up stablecoin demand by issuing more volcoins. With confidence in the system low, there are few buyers, so the volcoin price rapidly falls. Finally, once the volcoin price is near-zero, the stablecoin too collapses.”

In contrast, as RAI is backed by ETH, Buterin argued that declining confidence in the stablecoin would not cause a negative feedback loop between the two assets, resulting in less chance of a broader collapse. Meanwhile, users would also still be able to exchange RAI for the ETH locked in vaults which back the stablecoin and its lending mechanism.

2: Negative interest rates option required

Buterin also feels it is vital for an algo-stablecoin to be able to implement a negative interest rate when it is tracking “a basket of assets, a consumer price index, or some arbitrarily complex formula” that grows by 20% per year.

“Obviously, there is no genuine investment that can get anywhere close to 20% returns per year, and there is definitely no genuine investment that can keep increasing its return rate by 4% per year forever. But what happens if you try?” he said.

He stated that there are only two outcomes in this instance, either the project “charges some kind of negative interest rate on holders that equilibrates to basically cancel out the USD-denominated growth rate built into the index.”

Related: Ethereum price dips below the $1.8K support as bears prepare for Friday’s $1B options expiry

Or, “It turns into a Ponzi, giving stablecoin holders amazing returns for some time until one day it suddenly collapses with a bang.”

Buterin concluded by pointing out that just because an algo-stablecoin is able to handle the scenarios above, does not make it “safe:”

“It could still be fragile for other reasons (eg. insufficient collateral ratios), or have bugs or governance vulnerabilities. But steady-state and extreme-case soundness should always be one of the first things that we check for.”

FCA will ‘absolutely’ consider recent stablecoin depegging when drafting crypto rules: Report

The United Kingdom’s Economic and Finance Ministry announced in April that it would work to incorporate stablecoins into a regulatory framework on digital assets.

Sarah Pritchard, the executive director of markets at the United Kingdom’s Financial Conduct Authority, or FCA, reportedly said the regulator will look at the recent volatility in the crypto markets when creating rules for the space in 2022.

According to a Friday Bloomberg report, Pritchard said the financial regulator will “absolutely” take into account stablecoins like TerraUSD (UST) and Tether (USDT) depegging from the U.S. dollar in drafting regulatory guidelines with Her Majesty’s Treasury for release later this year. While the USDT price only briefly dropped to $0.97 on May 12, UST’s has fallen more than 93% since May 9 to reach roughly $0.06 at the time of publication.

“It really shows at front of mind the really significant issues that exist here, both in terms of a well-functioning market and obviously consumer protection,” said Pritchard. “In the last week where we saw significant price movements, it brings that into the fore and it shows the importance of making sure that people understand that that is a risk of where they put their money.”

The United Kingdom’s Economic and Finance Ministry announced in April that it would work to incorporate stablecoins into a regulatory framework on digital assets, given they could become “a widespread means of payment” for retail customers. In addition, HM Treasury said it would move forward with initiatives including reviewing tax legislation as applied to crypto assets, commissioning a nonfungible token, or NFT, for the Royal Mint, and exploring distributed ledger technology for use in U.K. financial markets.

Related: The new HM Treasury regulations: The good, the bad and the ugly

U.K. regulators as well as the Bank of England Financial Policy Committee said in March they were assessing crypto regulations in the country, specifically noting they “welcomed” HM Treasury’s proposals for incorporating stablecoins into the existing framework. The FCA also announced it had extended the temporary registration status of some firms offering crypto services beyond its original March 31 deadline. At the time of publication, five companies are permitted to “carry out crypto asset activities” under this temporary status, including Copper, CEX.IO, and Revolut.

FCA will ‘absolutely’ consider recent stablecoin depegging when drafting crypto rules: Report

The United Kingdom’s Economic and Finance Ministry announced in April that it would work to incorporate stablecoins into a regulatory framework on digital assets.

Sarah Pritchard, the executive director of markets at the United Kingdom’s Financial Conduct Authority, or FCA, reportedly said that the regulator will look at the recent volatility in the crypto markets when creating rules for the space in 2022.

According to a Friday Bloomberg report, Pritchard said the financial regulator will “absolutely” take into account stablecoins like TerraUSD (UST) and Tether (USDT) depegging from the United States dollar in drafting regulatory guidelines with Her Majesty’s Treasury for release later this year. While the USDT price only briefly dropped to $0.97 on May 12, UST has fallen more than 93% since May 9 to reach roughly $0.06 at the time of publication.

“It really shows at front of mind the really significant issues that exist here, both in terms of a well-functioning market and obviously consumer protection,” said Pritchard. “In the last week where we saw significant price movements, it brings that into the fore and it shows the importance of making sure that people understand that that is a risk of where they put their money.”

The United Kingdom’s Economic and Finance Ministry announced in April that it would work to incorporate stablecoins into a regulatory framework on digital assets, given that they could become “a widespread means of payment” for retail customers. In addition, HM Treasury said it would move forward with initiatives including reviewing tax legislation as applied to crypto assets, commissioning a nonfungible token, or NFT, for the Royal Mint, and exploring distributed ledger technology for use in U.K. financial markets.

Related: The new HM Treasury regulations: The good, the bad and the ugly

U.K. regulators and the Bank of England Financial Policy Committee said in March that they were assessing crypto regulations in the country, specifically noting they “welcomed” HM Treasury’s proposals for incorporating stablecoins into the existing framework. The FCA also announced it had extended the temporary registration status of some firms offering crypto services beyond its original March 31 deadline. At the time of publication, five companies are permitted to “carry out crypto asset activities” under this temporary status, including Copper, CEX.IO and Revolut.

Biden’s pick for Fed vice chair for supervision calls for congressional action on stablecoins

Fed nominee Michael Barr said that the government agency potentially releasing a central bank digital currency was an issue that required “a lot more thought and study.”

Michael Barr, a law professor and former advisory board member of Ripple Labs who is United States President Joe Biden’s pick for vice chair for supervision at the Federal Reserve, called for U.S. lawmakers to regulate stablecoins in an effort to address “financial stability risks.”

In a confirmation hearing before the Senate Banking Committee on Thursday, Barr said innovative technologies including cryptocurrencies had “some potential for upside in terms of economic benefit” but also “some significant risks,” citing the need for a regulatory framework on stablecoins to prevent the risk of runs. Barr added that the Fed potentially releasing a central bank digital currency was an issue that required “a lot more thought and study,” echoing Fed chair Jerome Powell’s views concerning due diligence.

Prospective Fed vice chair for supervision Michael Barr addressing the U.S. Senate Banking Committee on Thursday

According to Barr, “other agencies” within the U.S. government were responsible for addressing investor protection around cryptocurrencies. In attendance at the same hearing were prospective commissioners for the Securities and Exchange Commission — Jaime Lizárraga and Mark Uyeda — who, if confirmed, would serve under chair Gary Gensler. 

Responding to questioning from Massachusetts Senator Elizabeth Warren at the hearing, Barr confirmed that he would not work in “any financial services company” potentially having assets under the Federal Reserve’s purview for four years following his prospective time at the government agency. Warren cited the recent market volatility, which included TerraUSD (UST) depegging from the dollar and then attacked unnamed celebrities for endorsing certain crypto projects.

“Any investment involves risk — that’s how markets work,” said Warren. “But a market without rules is theft, and right now regular investors in stablecoins and crypto aren’t getting the baseline protections available in other financial markets.”

Related: Bitcoin shakes off Fed volatility as analysts remain split on return under $24K

Barr was Biden’s second nomination for Fed vice chair for supervision following the withdrawal of Sarah Bloom Raskin in March. If approved by the full Senate, Barr’s position at the Fed would allow him to help develop policy recommendations on supervision and regulation for other board members, including governors Michelle Bowman, Christopher Waller, Lisa Cook and Philip Jefferson, vice-chair Lael Brainard, and chair Powell — the latter four of which were confirmed in May. 

The vice chair for supervision position at the Fed has been vacant since governor Randal Quarles’ term ended in October 2021.

Bitcoin and Ethereum had a rough week, but derivatives data reveals a silver lining

BTC, ETH and altcoin prices were crushed this week, but the futures funding rate shows retail traders are not ready to become permabears.

This week the crypto market endured a sharp drop in valuation after Coinbase, the leading U.S. exchange, reported a $430 million quarterly net loss and South Korea announced plans to introduce a 20% tax on crypto gains.

During its worst moment, the total market crypto market cap faced a 39% drop from $1.81 trillion to $1.10 trillion in seven days, which is an impressive correction even for a volatile asset class. A similar size decrease in valuation was last seen in February 2021, creating bargains for the risk-takers.

Total crypto market capitalization, USD billion. Source: TradingView

Even with this week’s volatility, there were a few relief bounces as Bitcoin (BTC) bounced 18% from a $25,400 low to the current $30,000 level and Ether (ETH) price also made a brief rally to $2,100 after dropping to a near-year low at $1,700.

Institutional investors bought the dip, according to data from the Purpose Bitcoin ETF. The exchange-traded instrument is listed in Canada and it added 6,903 BTC on May 12, marking the largest single-day buy-in ever registered.

On May 12, the United States Treasury Secretary Janet Yellen stated that the stablecoin market is not a threat to the country’s financial stability. In a hearing of the House Financial Services Committee, Yellen added:

“They present the same kind of risks that we have known for centuries in connection with bank runs.”

The total crypto capitalization down 19.8% in seven days

The aggregate market capitalization of all cryptocurrencies shrank by 19.8% over the past seven days, and it currently stands at $1.4 trillion. However, some mid-capitalization altcoins were decimated and dropped more than 45% in one week.

Below are the top gainers and losers among the 80 largest cryptocurrencies by market capitalization.

Weekly winners and losers among the top-80 coins. Source: Nomics

Maker (MKR) benefited from the demise of a competing algorithmic stablecoin. While TerraUSD (UST) succumbed to the market downturn, breaking its peg well below $1, Dai (DAI) remained fully functional.

Terra (LUNA) faced an incredible 100% crash after the foundation responsible for administering the ecosystem reserve was forced to sell its Bitcoin position at a loss and issue trillions of LUNA tokens to compensate for its stablecoin breaking below $1.

Fantom (FTM) also faced a one-day 15.3% drop in the total value locked, the amount of FTM coins deposited on the ecosystem’s smart contracts. Fantom has been struggling since prominent Fantom Foundation team members Andre Cronje and Anton Nell resigned from the project.

Tether premium shows trickling demand from retail traders

The OKX Tether (USDT) premium indirectly measures retail trader crypto demand in China. It measures the difference between China-based USDT peer-to-peer trades and the official U.S. dollar currency.

Excessive buying demand puts the indicator above fair value, which is 100%. On the other hand, Tether‘s market offer is flooded during bearish markets, causing a 2% or higher discount.

Tether (USDT) peer-to-peer vs. USD/CNY. Source: OKX

Currently, the Tether premium stands at 101.3%, which is slightly positive. Furthermore, there has been no panic over the past two weeks. Such data indicate that Asian retail demand is not fading away, which is bullish, considering that the total cryptocurrency capitalization dropped 19.8% over the past seven days.

Related: What happened? Terra debacle exposes flaws plaguing the crypto industry

Altcoin funding rates have also dropped to worrying levels. Perpetual contracts (inverse swaps) have an embedded rate that is usually charged every eight hours. These instruments are retail traders‘ preferred derivatives because their price tends to perfectly track regular spot markets.

Exchanges use this fee to avoid exchange risk imbalances. A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

Seven-day accumulated perpetual futures funding rate. Source: Coinglass

Notice how the accumulated seven-day funding rate is mostly negative. This data indicates higher leverage from sellers (shorts). As an example, Solana‘s (SOL) negative 0.90% weekly rate equals 3.7% per month, a considerable burden for traders holding futures positions.

However, the two leading cryptocurrencies did not face the same leverage selling pressure, as measured by the accumulated funding rate. Typically, when there‘s an imbalance caused by excessive pessimism, that rate can easily move below negative 3% per month.

The absence of leverage shorts (sellers) in futures markets for Bitcoin and Ethereum and the modest bullishness from Asian retail traders should be interpreted as extremely healthy, especially after a -19.8% weekly performance.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

US Treasury Secretary reaffirms need for stablecoin regulation following UST crash

Janet Yellen said it would be “highly appropriate” to aim for “a consistent federal framework” on stablecoins by the end of 2022 in the U.S., given the growth of the market.

United States Secretary of the Treasury Janet Yellen called on U.S. lawmakers to develop a “consistent federal framework” on stablecoins to address risks to financial stability.

In a Tuesday hearing of the Senate Banking Committee on the Financial Stability Oversight Council Annual Report to Congress, Yellen reiterated her previous position calling for a regulatory framework on stablecoins, citing a November report from the President’s Working Group on Financial Markets. In addition, the Treasury Secretary commented on TerraUSD (UST), the third-largest stablecoin by market capitalization, dropping to $0.67 in the last 24 hours.

“I think [the situation with TerraUSD] simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate,” said Yellen.

Addressing questions to Yellen, Pennsylvania Senator Pat Toomey also pointed out that UST was an algorithmic stablecoin, “not backed by cash or securities.” The Treasury Secretary added it would be “highly appropriate” to aim for a “consistent federal framework” on stablecoins by the end of 2022 given the growth of the market. She called for bipartisanship among members of Congress to enact legislation for such a framework.

U.S. Treasury Secretary Janet Yellen addressing members of the Senate Banking Committee on Tuesday

In her written testimony for the hearing, Yellen said the Financial Stability Oversight Council was working on a report in compliance with United States President Joe Biden’s executive order on digital assets, identifying potential risks to financial stability as well as any gaps in regulatory oversight. The order called for several government agencies to coordinate and consolidate policy as part of efforts to develop a national framework on crypto.

Related: Secretary Yellen recognizes ‘benefits of crypto’ despite lingering skepticism

Serving as Treasury Secretary in the Biden administration since January 2021, Yellen has previously said cryptocurrencies represent a “particular concern” for the government department, associating many token projects with “illicit financing” and money laundering. Many of her recent public statements on policy concerning the crypto space seem to have focused on stablecoins and establishing an appropriate regulatory framework.

Acting OCC comptroller calls for standards on stablecoins

According to Michael Hsu, representatives from the crypto industry as well as within the U.S. government could work toward setting standards on stablecoins.

Michael Hsu, the acting head at the United States Office of the Comptroller of the Currency, said stablecoins need standards comparable to the early internet.

In a written statement following his appearance at the Artificial Intelligence and the Economy event in Washington D.C. on Wednesday, Hsu said stablecoins lacked “shared standards,” were “interoperable,” and needed standards similar to those set by the Internet Engineering Task Force and World Wide Web Consortium. According to the OCC head, representatives from the crypto industry as well as within the U.S. government — including the OCC and National Institute of Standards and Technology — could work toward such goals.

As the U.S. government bureau tasked with supervising federally licensed banks, the OCC is one of the regulators in the country whose purview crosses into the digital asset space, in addition to the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Last Friday, the OCC issued a consent order against Anchorage Digital due to its “failure to adopt and implement a compliance program” in accordance with the Anti-Money Laundering requirements agreed upon by the bureau in January 2021.

Related: Regulators are coming for stablecoins, but what should they start with?

In the United States, both lawmakers and government agencies have been grappling with how to handle stablecoins on a regulatory level in a type of legislative tug-of-war. In November 2021, ​​the President’s Working Group on Financial Markets released a report suggesting that legislation on stablecoins was “urgently needed” and issuers should be subject to “appropriate federal oversight” akin to that of banks. House of Representatives member Patrick McHenry has proposed a state-centered regulatory approach for stablecoins, while Senator Pat Toomey drafted a bill in April suggesting “payment stablecoins” be exempt from many U.S. securities regulations.

Terra’s UST flips BUSD to become third-largest stablecoin

UST market cap has surged to flip BUSD. However, its trading volumes are still only around one-fifth worth of the Binance digital dollar.

The Terra blockchain’s algorithmic stablecoin Terra USD (UST) has flipped Binance USD (BUSD) to become the third-largest stablecoin on the market.

UST is a United States dollar-pegged stablecoin that was launched in September 2020. Its minting mechanism requires a user to burn a reserve asset such as Terra (LUNA) to mint an equivalent amount of UST.

According to CoinGecko, UST’s total market capitalization has surged 15% over the past 30 days to sit at roughly $17.5 billion at the time of writing. The figure currently places UST as the third-largest stablecoin after it flipped BUSD with a slightly lower market cap of $17.46 billion.

The asset now trailing only behind industry giants Tether (USDT) at $82.8 billion, and USD Coin (USDC) at $50 billion. However, the gap is quite substantial at this stage.

The data also shows that UST has been on a meteoric pump since mid-November, with the market cap increasing by 525% since then.

UST Market cap: Coingecko

Despite flipping BUSD in terms of market cap, UST is trading in volumes well below its immediate competitor, with Binance’s stablecoin seeing $2.26 billion worth of trading volume over the past 24 hours compared to UST’s $431.79 million.

Terra has been grabbing the headlines of late, partly due to co-founder Do Kwon, who recently vowed that the project will accrue a whopping $10 billion worth of Bitcoin (BTC) to back its UST reserves.

Related Terraform Labs gifts another $880M to Luna Foundation Guard

Much like the wider crypto market of late, however, bullish announcements are doing little to push the price of LUNA upwards. The token’s price is down 12.4% over the past 30 days to sit at $77.31, while it is also down 34.4% since its brief all-time high of $119.18 on April 5.

What is crypto lending, and how does it work?

The borrower and the lender are two distinct actors in the crypto lending transaction. Borrowers put up cryptocurrency as collateral to secure a loan from a lender.

The COVID-19 pandemic had a deleterious effect on the returns from the conventional instruments of investments such as stocks, gold and real estate, driving investors in hordes toward crypto. Individuals and institutionalized investors alike have tried their luck in the industry that has rolled out decent returns even during the worldwide economic slump that horrified many investors.

Despite an intense debate raging about cryptocurrency offering a great window to grow wealth with alacrity and its extremely volatile ways, there is no denying the fact the industry has grown rapidly over the last two years. It is still innovating, trying different ideas and breaking more barriers in the process. One of these areas is crypto lending.

What is crypto lending?

Crypto lending is an ingenious instrument to obtain the cash you need quickly, as it allows you to utilize your crypto holdings as security to get secure loans. If you are wondering how do I borrow crypto, collateralized crypto lending is a viable solution. It allows borrowers to use their crypto assets as collateral to get a fiat or stablecoin loan.

This enables you to get the money without having to sell your coins, use the cash to fulfill your objectives and then repay to get back the hold on your assets. Crypto loans allow you to use digital assets you hold to generate dividends by lending out part or whole of the holdings.

Crypto lending platforms play a key role in dispensing such loans. Generally, you can borrow up to 50% of the value of your digital assets, though some platforms might allow you to borrow even more. Crypto loans generally don’t have a concept like EMI and borrowers may repay when they can before the fixed term ends. As for the interest rates, it is approximately 4% on Celsius Network on popular non-stablecoin cryptocurrencies.

As for the question, is lending crypto profitable, it depends on a string of factors. If you default on your debts, you end up losing your assets. Inconsistencies integral to crypto assets have led to more takers to stablecoin lending. On Celcius Network and Nexo, stablecoin lenders can earn 8%, while on Compound Finance — a decentralized crypto lending platform — the lending annual percentage rate (APR) for Dai (DAI) and USD Coin (USDC) is 12% and 9%, respectively.

Related: What is yield farming in DeFi?

How does stablecoin lending work?

When it comes to interest rates, peer-to-peer (P2P) lending and borrowing models are closely influenced by the supply and demand scenario. A high volume of loans coupled with a low supply from lenders means high returns for lenders. However, if the demand for crypto loans is low and the supply from lenders is high, the interest rate for borrowers will be low to attract the borrowers.

If you are considering why do stablecoins have high-interest rates, this section may come across as quite informative. The principle idea of supply and demand leads to stablecoin lending, providing annual returns in double digits. Stablecoins are still a budding industry, being just 2-3% of the total crypto market capitalization.

On the lending platforms, a substantial amount of the lending supply comes from stablecoins. Many buy these coins only to lend them on these platforms, but it’s alarmingly low compared to the supply of the top cryptocurrencies. Take the case of Compound Finance, where Ether (ETH) has 50% more gross supply than DAI and USDC combined.

Contrast it with the demand and you will find the figures are staggering. On Compound Finance, the demand for DAI trumps that of ETH by nearly 40 times. Large institutional traders and cryptocurrency payment processors are behind the huge demand for DAI. Institutional traders include the hedge funds and market makers clubbing on crypto loans for speculation purposes.

How does crypto lending work?

Just like a securities-based loan, a cryptocurrency-backed loan collateralizes digital currency. Basically, it resembles a mortgage loan. You give hold of your crypto assets to get the loan and repay it over a predetermined time. These types of loans can be obtained through a crypto lending platform or a crypto exchange. Though you still retain ownership of the collateralized crypto, you forego the right to make transactions using digital coins.

Crypto loans come across as a viable option because of several advantages such as low interest rates, choice of loan currency, lack of credit check, fast funding and the ability to earn passive income on your crypto that is otherwise lying idle. Moreover, you can lend your own digital coins and receive a high APY (more than 10%) on several crypto platforms.

All crypto lending transactions have two distinct parties: the borrower and the lender. It is for the borrower to deposit crypto assets as collateral to secure the loan from the lender. The arrangement works to mutual advantage, as the borrower receives an immediate loan in return for their crypto assets while the lenders earn interest on the amount released as a loan. If the borrower defaults, they dispose of the underlying crypto assets to realize their money.

Steps of crypto lending explained 

Whether you are looking for crypto lending on Binance, Coinbase or any other platform, the basics remain the same. Borrowers have to go through the following steps.

For the lenders, the steps to lending are provided

Things to know before getting into crypto lending and borrowing

Crypto lending is a replication of collateralized loans in fiat. You need to be careful of a few factors when dealing in cryptocurrencies.

Related: ‘Big Time’ Margin Call Can Skyrocket Bitcoin Price in Mid-Term: Analyst

Should you lend crypto?

You may be eager to know if crypto lending is safe. Before you go active on a crypto platform as a lender, make sure you are well-versed with the specifics. When you move your crypto to any platform for lending, they hold access to the keys to the cryptocurrency — not you. You just have the bond issued by the smart contract. Check the auditing standards of the smart contract, the history of the project and its team can help you guide your decisions.

If you begin lending with your eyes closed, do not be surprised if your crypto disappears. QuadrigaCX, for instance, is nothing less than a horror story. A Netflix documentary discussed the suspicious death of Gerald Cotton, the founder of QuadrigaCX, the Canadian cryptocurrency exchange and how he misappropriated customer funds. About $190 million worth of digital assets kept on the exchange were lost.

To sum up, you need to do your due diligence before taking a call on the platform you’d be using for lending and borrowing. Regardless of the lending platform, knowing your game and limitations is extremely important when it comes to successful innings. A mistake might prove costly, so better put in the best of your exploratory skills to work.

Pro traders turn into bears after Ethereum price dropped to $3,200

Regulatory uncertainty, potential competition from tech giants and a market nearing exhaustion are all factors impacting ETH price.

After a 42% rally over a three-week period, Ether (ETH) peaked at $3,580 on April 3 and since then, a 12% correction to $3,140 has taken place.

Tech giants launching their own smart contract platforms and regulatory uncertainty might have impacted investors’ sentiment and derivatives metrics also show worsening conditions that confirm professional traders’ shift toward a bearish sentiment.

Ether/USD price at FTX. Source: TradingView

On April 6, the Financial Times reported that Meta is reportedly planning to introduce virtual currency and lending services. This move is aimed at exploring alternative sources of revenue for Facebook, WhatsApp, Instagram and Messenger.

United States Senator Pat Toomey, the ranking member of the Senate Banking Committee, also drafted a bill proposing a regulatory framework for stablecoins. The legislation requires issuers to back up their stablecoin reserves with assets “that are cash and cash equivalents or level 1 high-quality liquid assets denominated in U.S. dollars.”

Despite Ether’s price correction to $3,200, the network’s value locked in smart contracts increased 13% in 30 days to $85.6 billion. Thus, it is worth exploring whether the mood of derivatives traders was impacted by the recent price rejection.

Derivatives show Ether traders flipping bearish

To understand whether the market has flipped bearish, traders must look at the Ether futures contracts’ premium, also known as the “basis.” Unlike a perpetual contract, these fixed-calendar futures do not have a funding rate, so their price will differ vastly from regular spot exchanges.

A trader can gauge the market bullishness level by measuring the expense gap between futures and the regular spot market.

Ether perpetual futures 8-hour funding rate. Source: Coinglass.com

Futures should trade at a 5% to 12% annualized premium in healthy markets. Yet, as displayed above, Ether’s annualized premium has decreased from 6% on April 5 to the current 4.5%.

Related: The FDIC wants US banks to report on current and intended crypto-related activities

Options markets flirt with pessimism

To exclude externalities specific to the futures instrument, traders should also analyze the options markets. The 25% delta skew compares similar call (buy) and put (sell) options. The metric will turn positive when fear is prevalent because the protective put options premium is higher than similar risk call options.

The opposite holds when greed is prevalent, causing the 25% delta skew indicator to shift to the negative area.

Ether 30-day options 25% delta skew. Source: Laevitas.ch

The 25% skew indicator has been ranging between 4% and 8% since March 22, indicating balanced pricing for bullish and bearish options. However, the correction to $3,140 on April 7 caused the metric to momentarily test 9.5%, the threshold for a neutral-to-bearish sentiment.

While the current 7% reading is still neutral, it is safe to say that Ether pro traders became more uncomfortable as Ether traded down 12% in four days. Presently, there is a mild sense of bearishness in the market.

Of course, none of that can predict when Ether will continue to downtrend but considering the current derivatives data, there’s less demand for leverage longs.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.