When terra crypto went bankrupt, ordinary people went bankrupt

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Steve Insall watched his savings vanish by the second in an app on his phone.

He spent most of Tuesday, May 10, in his apartment, trying to remove whatever was left of the $320,000 balance that had been there days before.

The app wouldn’t let him. As he watched Bloomberg TV talk about a cryptocurrency he had only heard about the day before, he tried to hide his panic from his wife.

“She was getting ready for labor, the baby was eating in the high chair,” Insall said. “The 3 year old was on an iPad. I kept everything inside.

Insall was losing his savings due to the crash of terraUSD, an algorithmic “stablecoin” that lost $60 billion in a matter of days. Stablecoins are an integral part of the cryptocurrency economy and are supposed to never break away from the dollar.

If you wonder why anyone would tie all their money to an algorithmic stablecoin, Insall wonders that too. He didn’t know that was where his money was.

“I honestly didn’t even know what ‘depegging’ was,” he said.

Insall is one of nearly 5,000 retail investors who made $47 million deposits into Stablegains, a now-defunct company that offered a crypto facsimile of a savings account with premium rates. interest of up to 15%.

Many Stablegains users – including bartenders, postal workers and general contractors – feel they have been misled by Stablegains marketing, which has highlighted the security, ease and promise of decentralized finance, or “DeFi” abbreviated.

The Stablegains experience has left many rethinking the boundaries of a common mantra among crypto investors: “Do your research.” What if you thought you had done the research and lost everything?

A New Market for DeFi “Guardians”

Stablegains is a Delaware-incorporated startup that launched in August.

In blog posts and on its website, the company compared its offerings to traditional savings accounts. Except when a brick-and-mortar bank like Citi gave depositors less than 1% interest, Stablegains could offer up to 15%.

How can a savings account earn 15% interest? Through the miracle of DeFi.

“What’s being promoted by people involved in DeFi is that not only does it look like legacy funding, but it’s actually better,” said Ryan Clements, a law professor at the University of Calgary, who predicted the collapse of terraUSD. “Because we’re disintermediating the banks, we’re disintermediating the investment managers, and oh, by the way, that delivers significantly higher returns.”

Think about how a bank works: you deposit money, the bank lends it to mortgage holders and businesses, the bank collects interest on those loans, and you get a reduction of that interest.

The same principles are associated with DeFi, but cash deposits are converted into crypto, and that crypto is loaned out to borrowers who typically invest in more crypto.

In fact, depositing or borrowing directly from a DeFi platform often requires a decent degree of technical sophistication – which is where a company like Stablegains comes in.

“So there’s this new market of what I call gatekeepers or middlemen emerging,” Clements said. “[They’re] saying, ‘Hey, we’ll do it for you. You deposit your funds with us, we will keep these funds, then we will take the necessary technical measures to connect to this world.

The Stablegains keynote was aimed at retail investors with varying degrees of tech savvy.

“I don’t like Snapchat, I don’t like TikTok, I don’t like these other things,” said Jayson Noetzel, a Kansas general contractor who has also poured his savings into Stablegains.

Noetzel may not be TikTok, but he came across Stablegains through an old form of social media.

“I’m pretty sure I saw them on Facebook,” Noetzel said. “Like I’m googling Roth IRAs, mutual funds, so of course Google and Facebook must be in cahoots with each other because all of a sudden you start seeing investments announced on Facebook.”

An impressive pedigree

Noetzel, Insall and others have felt comfortable depositing their savings with Stablegains in part because of the company’s pedigree. The startup was backed by Y Combinator, the prestigious venture capital accelerator that launched tech titans like Airbnb and Dropbox.

“I was like, ‘Wow, they have a lot of confidence in people who are richer and smarter than me,'” Insall said. “It seems like a no-brainer.”

But the real sell for many Stablegains users was the convenience of its accounts. It offered direct deposits from checking accounts and wire transfers and no long-term lock-up periods. And although he was not FDIC insured, he still had a plan to mitigate risk.

“He said they were diversified across multiple types of stablecoins, so if one was weak they would do each other,” Noetzel said. “And they said all investments were backed by guarantees.”

Noetzel, Insall and others were particularly reassured that one of the prominent stablecoins on the Stablegains website was USDC. While algorithmic stablecoins like terraUSD were tied to the dollar through a complex web of math and code, USDC was backed by real dollars and treasury bills.

But if Stablegains users had read the company’s terms of service, they would discover that Stablegains generates its high interest rates by depositing funds into the Anchor protocol, another crypto savings service. Anchor only takes deposits and pays interest on terraUSD. When Terra crashed, so did Anchor, and Stablegains fell.

Stablegains declined a request for an interview but referred to a public statement.

“Of course, as all users know, there are risks in the DeFi space, which are publicly known and also disclosed in our Terms of Service, online in our Learning Center, website footer and the blog – but this event was particularly unfortunate because we were confident in our corporate vision and its ability to benefit users. At this time, our focus remains on helping users who have funds remaining in their accounts. »

Stablegains’ plans to diversify beyond Anchor have been referenced here and there on the Stablegains website. Via email, the company’s co-founder, Kamil Ryszkowski, also linked a message the company had posted on his Discord channel, which sought user feedback on what other crypto lending platforms Stablegains should explore. in the future.

Yet even sophisticated crypto investors who had money in Stablegains were surprised to learn that their deposits were tied to terraUSD.

“Retail investors were coming into this space and thinking they were getting the same product and service they were getting in traditional finance,” said Clements, a law professor at the University of Calgary.

“But they weren’t. They did not obtain the same regulatory guarantees. I think there has to be clear disclosure, but also accessible disclosure.

Benefits and compensation

After being contacted by several Stablegains users, Kevin Osborne of class action law firm EKO Law explored the possibility of a lawsuit.

But for now, any draft litigation is on hold. “If a defendant has very few liquid assets, has no insurance, then you’re not going to do anything for the people you’re representing,” Osborne said.

And to sue venture capital backers of Stablegains, plaintiffs must meet a high legal threshold, he added. But there is a somewhat ironic source of hope for Stablegains users in all of this.

Many banks allow them to reverse at least part of their direct deposits into Stablegains.

Noetzel, the Kansas entrepreneur, said it looks like he can recover most of what he lost this way. Like many other Stablegains users, he said he wouldn’t rule out investing some of it in crypto again.

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