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Sang Lee

Trust in stablecoins ‘infinitely more important’ than collateral

As the debate over the trustworthiness of stablecoins intensifies due to Terra, one expert thinks builders should push for the coins to be decentralized with a clear use case.

In light of recent market effects due to the collapse of the Terra USD (UST) stablecoin, several questions should be answered about what makes a stablecoin usable as the crypto market expands.

Co-founder of crypto financial service provider VegaX Holdings Sang Lee favors decentralized stablecoins over their centralized counterparts but thinks they must be coins that people can trust, which poses a dilemma for the industry.

In a conversation with Cointelegraph on May 13, Lee pointed out that the important utility stablecoins serve in the crypto ecosystem was offering traders a uniform unit of account, like the U.S. dollar does for the global markets. However, he noted that “the way in which these things are maintained is important, too.”

“The most important thing is that it holds its peg because then that single unit of account begins to be unreliable and unusable.”

Lee believes that for stablecoins to be truly usable, people have to trust them. This creates a dilemma because, he said, “you can only use a currency if you trust it, but you trust it because other people use it.” In his view, that dilemma can be nipped in the bud by ensuring there is a broad use case before building because the “use case is infinitely more important than collateral.”

The issues of trust and design are at the forefront of the discussion surrounding the UST stablecoin, which lost its peg and drove down the price of Terra (LUNA) and Bitcoin (BTC), its collateral. As trust rapidly faded in the stablecoin, so did its utility, forcing its value and the value of LUNA to evaporate.

There are at least 97 stablecoins across the crypto industry today according to CoinGecko, most of which are pegged to the USD. While that number may seem high, Lee contests that there should be “more than a handful” of them, and they should aim to be decentralized.

“We can’t have 'one to rule them all,' because that’s what we’re trying to stop in the first place.”

Among the top five stablecoins by market cap, just Dai (DAI) and Magical Internet Money (MIM) are aiming to be decentralized.

Lee acknowledges that it is unrealistic to expect the leading stablecoins to be decentralized right away but feels they “should be on a path to it in the future.” This idea stems from his perception that the single point of failure that cryptocurrency is trying to solve is “a lack of transparency and accountability” in centralized currencies.

Related: SEC's Hester Peirce says new stablecoin regs need to allow room for failure

In pushing crypto into a more decentralized landscape, Lee warns those in the industry to move away from a combative stance and more into a friendly, collaborative one. He said,

“We can move the world forward into a blockchain-based ecosystem, which is overall a good thing. But it’s better to talk about what we in blockchain think is important rather than shouting that our tech is better.”

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Decentralization ‘absolutely essential’ in building crypto capital markets

Sang Lee believes blockchain technology developments have already left traditional banks in the dust, but adoption remains relatively low due to several factors.

If crypto capital markets have a chance of becoming an institutional reality, decentralization will be one of the key aspects according to one industry insider.

Capital markets bring suppliers and those in need of capital together to initiate supposedly efficient transactions. Investments or savings are often funneled between suppliers of funds like banks and those who need capital like businesses, governments and individuals.

Co-founder of crypto financial service provider VegaX Holdings Sang Lee told Cointelegraph today that incumbent financial institutions have simply been left behind by the rapid pace of developments in the crypto industry.

VegaX Holdings is building a suite of crypto-based financial services. Its VegaX decentralized finance (DeFi) platform allows staking while its Konstellation ecosystem is a DeFi ecosystem based on Cosmos (ATOM).

Lee believes decentralization is likely the most important thing that will help crypto enter capital markets. Decentralization involves removing costly intermediaries in decision making and in executing transactions.

Lee decried the current state of centralized payments platforms in saying “You can’t send a wire on the weekend which is atrocious. And the amount of times a stock changes hands when you buy it is atrocious.” He added:

“We have evolved far enough to say we don’t need people as intermediaries. It was necessary before but not anymore.”

Intermediaries tend to increase the amount of fees spent and the amount of time required to make an investment, thereby potentially reducing potential returns. Removing them through decentralization may be a viable way to make markets more efficient and help investors earn higher returns.

Lee also believes stablecoins will play an essential role in expanding capital markets in crypto. To him, stablecoins have the strongest potential to leapfrog other digital assets and even fiat currency because most stablecoins, such as Tether (USDT) and Dai (DAI) are still denominated in US dollars.

He emphasized that stablecoins allow investors to have a universal unit of account with which to transact. More importantly, stablecoins are things that everyone will be using since they add a sense of constancy, especially if markets become frothy. Lee said:

“In an economy where things become murkier and harder to track, a stablecoin helps even things out.”

The world’s second largest stablecoin by market cap Circle’s USD Coin (USDC) has already begun making a bid to enter capital markets with new partner BlackRock’s backing.

Ultimately, Lee believes the flow of money, people, and things will go from the traditional financial world into blockchain, not the other way around. As he put it,

“Crypto will probably refuse to be brought into the incumbent fold. Things off-chain will move on-chain, but it won’t go in reverse.”

However, he believes “DeFi and crypto markets need to have a lot more efficiency” to help the rate of adoption increase as the technology improves. In his view, a good deal of inefficiency comes from the “unusable” platforms designed to help inexperienced users bring funds into crypto. He added:

“People are avoiding the best performing asset class in history because there’s no way to get there. If platforms were more usable for the layperson adoption would be a lot higher than it is now.”

This opinion echoes an analysis made by Cointelegraph on April 12 that sees traditional financial resistance to using crypto as an increasingly obvious exercise in futility.

Bringing things on to the blockchain and into crypto requires token bridges, which Vitalik Buterin raised concerns about in early Jan. They have also been the target of several security breaches already in 2022 amounting to nearly $1 billion in losses.

Related: Blockchain.com names custody partner for its institutional offering

Regardless, Lee sees them as an essential part of the capital markets infrastructure. He said “We need bridges to build out the capital markets, but the problem is most bridges are pseudo-centralized.”

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