Pether (12)
Kang Mundo graduated from the electronics engineering department at Heist University, then brushed off the outstretched hands of the conglomerates and founded a startup focused on blockchain.
At the time, the biggest issue in IT was crypto. Unlike the old internet, where Big Tech had already claimed every inch of ground, cryptocurrency and blockchain still felt like open country, a place where anything seemed possible.
He built decentralized applications and NFTs on Elderium, but they never drew much of a response. Then, at a blockchain forum in Singapore, he heard Leonard Chang speak, and from that day on, he began to think he should build a cryptocurrency of his own.
The sky-high rise in crypto prices was already reshaping the global rich list. If a coin hit big, becoming a millionaire or billionaire was nothing special.
If I really want to make serious money, I need to make the coin myself.
Every day, hundreds, even thousands of coins flooded the market. If he made one now, it would probably just get buried beneath the rest.
So he turned his attention to stablecoins.
There were roughly 9,000 coins in circulation, but only about ten of them were stablecoins. That made sense. A stablecoin was not a store of value; it was a medium of exchange, money in the truest sense. There was no reason to use a dozen different kinds of money when one would do.
If I can make a stablecoin that actually works, maybe I can make this succeed.
There were two broad types of stablecoin. The first was backed by fiat currency like dollars or yen. The second was backed by crypto assets such as Vantcoin or Elderium.
In the latter case, one dollar’s worth of Vantcoin would be exchanged on demand, whenever necessary.
The advantage was that value could be maintained on-chain without a centralized system. The drawback was just as obvious: if Vantcoin’s price fell, the collateral value would fall with it, and that could become dangerous.
If the collateral for a stablecoin is crypto, then why not just build the collateral myself too?
He raised investment, founded Saturn Labs, and began development in earnest. The first thing he created was the stablecoin Saturn, along with Titan, the token that supported Saturn’s algorithm.
The two were separate coins, but they were tied together on a single blockchain.
In Pether’s case, the issuer acted as the LP, buying and selling to maintain the peg. Saturn, however, was designed so that the peg would be maintained automatically by algorithm.
If Saturn fell to $0.80, Titan would be minted automatically and used to buy Saturn with a dollar’s worth of Titan, which would then be burned. Naturally, users would rather receive a dollar’s worth of Titan than hold one Saturn worth only $0.80, so demand to exchange Saturn for Titan would rise. That would reduce Saturn’s supply and push its price back up.
On the other hand, if Saturn rose to $1.20, the system would allow one Saturn to be exchanged for a dollar’s worth of Titan. Since one dollar’s worth of Titan was less attractive than a Saturn worth $1.20, demand would shift toward exchanging Titan for Saturn. Saturn’s supply would increase, and its price would come back down.
He attended crypto forums, explained the Saturn and Titan algorithm, and laid out the revenue model.
“Saturn is a stablecoin, so it’s used for remittances and trading. The fees generated by those transactions are distributed to Titan holders. If Saturn is a credit card, then Titan holders are the card company’s shareholders. When people use a credit card, fees are generated, and those fees are passed through the company and paid out to shareholders as dividends. The more people use Saturn and the more active trading becomes, the more Titan holders stand to profit.”
Saturn and Titan quickly became wildly popular, listing one after another on major overseas exchanges like CoinMax and CoinBasic, and also on Korea’s three biggest crypto exchanges: BitUp, Bansom, and OneCoin.
Kang Mundo then founded the DeFi protocol Mars Protocol to further energize Saturn.
Anyone who staked Saturn there would receive 24 percent annual interest. Once his fame spread alongside that eye-popping rate, countless investors bought Saturn and staked it in Mars Protocol.
Some even put in their entire fortunes.
Demand for Saturn surged, and issuance expanded sharply with it.
As the number of Saturn users grew, so did expectations for fee revenue, and Titan began to soar.
Before long, Saturn and Titan were both sitting comfortably in the top fifteen by market cap, and together they were worth more than $50 billion.
It was an astonishing success in a market flooded with coins.
The media didn’t hold back in its praise.
But there were also those who pointed out problems.
“The revenue structure of Mars Protocol is unclear. Please explain how you can possibly generate 24 percent annual returns.”
“The algorithm itself looks highly vulnerable to external shocks. Do you have any countermeasures in place?”
Kang Mundo answered those criticisms with mockery.
“Go ask your mother.”
People only became more excited by that attitude.
When asked whether fiat collateral was necessary, he answered with confidence.
“The core of crypto is decentralization. But backing it with fiat currency undermines that very ideal. Saturn and Titan are already running on a perfect algorithm. That said, in the interest of strengthening stability, we’ll hold some of our assets in Vantcoin.”
Saturn Labs bought as many as 30,000 Vantcoins, which helped send both Vantcoin and the rest of the crypto market higher as well.
Titan investors began calling themselves the Titan Tribe, convinced beyond doubt that Saturn was headed to $10,000.
As with everything else, there were no real problems when things were going well.
And then…
Once Continue Capital’s short on Pether shook the market, everything started to wobble. As Vantcoin, Elderium, and the rest of crypto fell, Saturn too began breaking its peg again and again.
Hedge funds didn’t miss the opening.
They deliberately dumped massive amounts of Saturn onto exchanges.
When Saturn fell to $0.90, Titan was automatically minted according to the algorithm and stepped in to buy. Under normal circumstances, the peg should have snapped back immediately. But the hedge funds had already decided to keep dumping supply and trigger panic selling.
The problem was that the entire crypto market was already sliding, which meant Titan’s price was falling too.
What had once required one Titan to defend now required two. But as issuance increased, Titan’s price sank even further, and this time it took ten, then a hundred, to defend the peg.
Even then, the system couldn’t restore the peg. Titan began to be minted without limit under the algorithm, and as Titan’s value collapsed, Saturn’s value collapsed with it.
What had once been one billion Titan tokens ballooned to an unimaginable five trillion, and yet the system still failed to push Saturn back to $1.
Once Titan, the asset that had been propping up the value, turned into scrap, the stablecoin Saturn turned into scrap as well. And just like that, the combined $50 billion in market cap vanished into thin air.
When the coins they held plunged in an instant to $0.000001, investors were stunned.
Coin collapses and delistings happened all the time. But unlike scam coins that had been created from the start to run off with people’s money, Saturn and Titan had been operating normally.
And yet they crashed in an instant, and Kang Mundo disappeared without a trace. The 30,000 Vantcoins Saturn Labs had been holding vanished as well.
The fall of Saturn and Titan, both of which had been inside the crypto market’s top fifteen, dragged the entire market back down with them.
The cause of Saturn and Titan’s collapse had been Pether’s depegging. But once Saturn and Titan collapsed, that in turn became another reason Pether fell further.
At that point, nobody could trust stablecoins anymore, let alone anything else.
Investors had spent all their time chanting about decentralization and insisting that crypto would replace traditional money. But when the crisis actually hit, what they reached for was the dollar.
It was panic selling, plain and simple.
To calm the stampede, trading had to be stopped first.
If this had happened in the stock market or the bond market, the government would have stepped in immediately, halted trading, and taken measures to stabilize things.
But crypto exchanges had no sidecars or circuit breakers.
And even if one exchange stopped, people could always just go trade on another one. So no matter how badly the market was collapsing, trading never stopped.
Investors were in complete panic.
The market’s attention swung back to Pether.
Pether was now down to $0.50.
Even with redemptions suspended, the reason it still held on to anything like that value was because Leonard Chang kept publicly promising that he would restore the peg to $1.
After all, the Pether selloff had already gone as far as it could.
If he could get his hands on just $3 billion, he could satisfy the institutions demanding redemption, buy up Pether in circulation, and re-peg it.
If he could pull off a visible success, the panic selling would calm down too.
Leonard Chang used CoinMax as collateral and asked the banks for a loan.
If I can get the loan, I can fix this.
But things did not go the way he wanted.
CoinBasic was the world’s third-largest crypto exchange, with 60 million users, and the only exchange listed on Nasdaq.
Exchanges received a fixed percentage of trading volume in cryptocurrency. When crypto prices rose, trading volume and transaction value increased, which in turn meant the company’s revenue also grew.
After its listing, Vantcoin had exploded higher, and CoinBasic’s market cap had quintupled to break through the $100 billion mark.
But just one week after the crisis began, it had lost 90 percent of its value and was now teetering below $10 billion.
In an email to employees, CEO Mayway wrote that the “crypto winter has arrived” and that no one knew when spring would return. He then announced that he would lay off 900 of the company’s 5,000 employees, or 18 percent of the workforce.
If a public company’s stock could collapse like that, there was no way an unlisted company like CoinMax could be valued properly either.
On top of that, CoinMax had been offering leveraged investing by using customers’ crypto as collateral. Investors would pledge the coins they already held, borrow more coins, and invest again. It was a lot like margin lending and credit trading at a securities firm.
In a bull market, that let investors make huge sums of money, while the exchange earned more in interest and even more in fees.
But…
Who in the world didn’t know that borrowing money to invest could make you richer?
The reason people didn’t do it was because the risks were just as large.
The promise of massive gains in a rising market was exactly the same thing as saying a crashing market could trigger a chain reaction of forced liquidations.
And that was exactly what was happening now.
As coin prices plunged, collateral values shrank, and under the rules of the system the collateral was sold off to close out the loans.
Those liquidation orders flooded the market, pushing prices even lower, and those lower prices reduced collateral values again, triggering yet another round of liquidations.
The problem was that prices were falling so fast that even after selling the collateral, there were cases where the loans still couldn’t be fully repaid.
CoinMax absorbed those losses directly, and the damage grew like a snowball rolling downhill.
Leonard Chang watched the market collapse.
CoinMax, once valued at $200 billion, was now worth less than $10 billion.
The banks no longer even took his calls.
Where did it all go wrong?
If he had only reduced Pether issuance a little, if he had converted Vantcoin to dollars earlier, if he had bought U.S. Treasuries instead of DAO Group’s notes and bonds…
He thought of the man he had met at the party.
Even while they had been talking, that man had probably already been planning to attack Pether.
If I’d noticed sooner…
If he had managed risk just a little better, he might have avoided everything that was happening now.
But regret came too late.
Pether’s success had made CoinMax the largest exchange in the world, and made him the richest man on earth.
The reason people believed Pether was worth $1 was that they trusted Leonard Chang.
But the moment that trust vanished, everything came crashing down.