Pether (7)
Snow Crash's DeFi protocol, known as the PN Protocol, had exploded in popularity the moment it launched.
Pether was a stablecoin pegged to the dollar. Because its price never moved, it wasn't really something people invested in; it was just idle capital sitting in the crypto market.
But if you staked the Penny minted from it into the PN Protocol, you could earn interest of as much as 5 percent every three months. And if, after three months, you failed to redeem your collateral, the protocol would return the one Penny posted as collateral and pay double the original rate—10 percent interest.
The crucial point was the credibility of the cryptocurrency being used as collateral. Its supply had been verified, and the reserves were held in bank deposits and U.S. Treasury bonds through a trust institution, so it was supposedly one hundred percent safe.
On top of that, the issuer was Snow Crash, and the reserves were guaranteed by Continue Capital. At that point, unless the United States itself went bankrupt, there was little reason to expect a loss.
For that reason, the PN Protocol pulled in $40 billion in less than a week after launch, as if it were absorbing every Pether floating around the market.
What puzzled everyone was how they could possibly generate returns well enough to pay that kind of interest. If they weren't making a profit somewhere, then the only place the interest could come from was their own money.
Among investors, opinions split sharply over the issue.
“Maybe they're planning to jump straight into the crypto market?”
“No way. Are they trying to make investments in crypto?”
“To buy up Vantcoin?”
“Five percent every three months is absurdly expensive as an interest rate, but in this market, five percent volatility is nothing.”
“Honestly, if it's Continue Capital, five percent is probably nothing to them.”
“With $50 billion, they could probably force the price wherever they wanted.”
“But why bother paying five percent interest? Wouldn't it be easier just to buy Pether outright?”
“Isn't this really just about circulating Penny? After this, Penny's gotten famous.”
“Yeah, it's not like they're handing it out through an ICO or an airdrop.”
Even though both were stablecoins, Penny and Pether were built for entirely different purposes.
Penny had been created for spending and payment within the cloud environment, as a substitute for cash, while Pether was used for transferring and managing assets between exchanges.
That was why Penny couldn't be used for crypto trading at all.
Unlike Pether, which was listed on nearly every exchange, Penny wasn't listed anywhere. So even if they used Penny as collateral to gather Pether and invest with it, there was nothing particularly strange about that.
The market took it as a positive sign, expecting Continue Capital to move into large-scale crypto investment.
The news that Continue Capital and Empty Pool Research had joined forces to short Pether hit the market like a hammer blow.
Shocked investors dumped Pether in a panic, and selling volume surged briefly, but fortunately it never fell below $0.999. Its peg held steady without any major disruption.
The real problem was everything else.
Vantcoin, which had been climbing past $80,000 and aiming for $100,000, crashed 7 percent. Elderium fell 11 percent, and altcoins plunged by more than 30 percent.
The websites frequented by crypto investors were in chaos.
Representative Lentz appeared on NBC, CNN, and Fox News in rapid succession, pointing out Pether's problems one by one.
“Pether has never undergone a proper accounting audit. They simply released a single sheet of paper. If they invested in emerging markets, they were exposed not only to corporate stability risk but also to exchange-rate risk. Depending on changes in market conditions, that can lead to asset losses. And our analysis suggests that a substantial portion of their assets are probably held in cryptocurrency. In other words, they issued Pether to buy crypto and push the price up, and then issued even more Pether by holding the cryptocurrency they had pumped. If the market goes down, the collateral's value will shrink in an instant. The only one hundred percent safe assets are dollars and U.S. Treasury bonds.”
The reporter asked him, “Didn't the Pether side release a certificate from an accounting firm?”
“That was an informal audit conducted by the company itself. Collateral valuations based on no recognized standard can't be trusted. We've repeatedly asked them to disclose the detailed breakdown of their assets, but they've refused, saying it would expose their position. If there's really nothing wrong with Pether's reserves, then they can simply undergo a proper audit and disclose their assets transparently. Continue Capital did that. Why can't Pether Limited?”
“Then how much of a shortfall do you think Pether's reserves have?”
“According to our analysis, it's more than 30 percent. If the value of the collateral falls, it could easily exceed 50 percent.”
“I-I see.”
At that, the reporter couldn't hide his flustered expression. It made sense; even 30 percent meant a missing $50 billion.
“The entire crypto market is being shocked by this. What do you think of the criticism that you're disturbing the market?”
Representative Lentz gave a cold smile.
“Starbucks' prepaid balance is already $1 billion, which is more than many small and midsize banks. If someone were to ask for a mass refund of that balance, would Starbucks take it as an attack on the company? Of course not. That's because that money was never Starbucks' to begin with—it belongs to the customers who put it in. So if they ask for a refund at any time, Starbucks has to return it. Pether is the same. When you put in one dollar, one Pether is issued. Pether Limited has said all along that it has deposited an amount equal to one hundred percent of the Pether it issued, and that it can convert it back to dollars at any time. If they really do have dollars equal to the Pether they've issued, then there shouldn't be any problem. Selling Pether is no different from requesting a refund on prepaid credit. If anything, the reason they keep calling this an attack is because they don't actually have those reserves.”
I watched Representative Lentz's interview together with David.
“He's good with words,” I said.
David nodded.
“Representative Lentz is famous on Wall Street for being articulate. He's also an excellent writer. It's said that every report Empty Pool Research publishes is personally reviewed by him.”
Having someone who could fight on your behalf was a convenient thing.
We had already put in $50 billion.
It was an enormous sum, but even that alone wouldn't be enough to bring Pether down.
“$50 billion should be easy enough for them to defend.”
“Probably.”
Leonard Chang was the owner of the world's largest crypto exchange and the owner of the world's largest stablecoin issuer.
There was no way he was going to fall over because of only $50 billion—or so one would think.
But then...
I said with confidence, “When there's the smell of blood, the sharks always come swarming in.”
The first cryptocurrency, Vantcoin, had appeared about ten years earlier.
Back when it was worth less than a cent, Vantcoin had climbed past $80,000, and as countless altcoins such as Elderium flooded the market, the total market capitalization of crypto as a whole had grown to $3 trillion.
Never before in history had a single market expanded that quickly.
Even Goldman Sachs, JPMorgan, Wells Fargo, HSBC, and the other established financial giants that had initially viewed it negatively had begun launching crypto-related derivatives and making direct investments.
More recently, private equity funds had also been adding cryptocurrencies to their portfolios, and firms dedicated exclusively to crypto investing had started to appear.
With liquidity flooding the market, enthusiasm for new technology, institutional investment, and expectations of mainstream acceptance all piling up at once, the crypto market was now so lively that it felt like a second golden age.
Vantcoin and Elderium were hitting new highs every day, altcoins were surging by the hundreds of percent, and ICOs were being launched all over the place.
As the market expanded, Pether's issuance kept climbing too.
The issue of Pether's reserves had already been raised years earlier.
When the total issuance was $10 billion, or $20 billion, it wasn't much of a problem. The same was true at $50 billion.
But once it passed $100 billion and then $150 billion, the number of people who began questioning it steadily increased.
In truth, there had been several previous attempts to attack Pether. In Empty Pool Research's case, they had even openly searched for a whistleblower.
But every one of those attempts ended before it had even truly begun.
Because Pether's market cap was so enormous, they knew that ordinary attacks wouldn't make a dent in it.
But once Continue Capital stepped in, the atmosphere changed.
Just the rumor alone had jolted the entire market.
Investment firms on Wall Street moved at once.
“Bring me everything we have on Pether's assets!”
“Now. Find out the cost and method of shorting it immediately.”
“Recheck the portfolio and analyze the impact on the crypto market. I want it on my desk by today!”
Every investment house turned its attention to the Pether short led by Continue Capital.
How likely was it, really, to succeed?
In truth, short selling was an extremely risky strategy.
The expected gain was capped, while the expected loss was unlimited. In practice, a single bad short had often been enough to bankrupt an investment firm.
But the Pether short was different.
If it succeeded, the upside would be close to 100 percent, while even if it failed, the loss would be only 5 to 6 percent.
The same thought flashed through everyone's mind.
At this point, isn't it worth taking a shot?