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Terra Aftershocks: Regulation and Decouplings

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Reverberations from the Terra ecosystem meltdown, which has seen partner tokens Luna and TerraUSD implode completely, have shaken the entire crypto space. Events were made even more jarring by the timing of events, coming when the macro outlook is ominous and chaotic, and although the worst of the most immediate impact may now be over, knock-on effects and aftershocks are likely to come down the line.

Regulatory interest

One glaring likelihood is that the people and organizations who want to get serious about regulating crypto, now have an opportune moment, immediately after a major protocol has malfunctioned and taken out swathes of investors, from which to get started on those regulations.

A positive take on this would be that if a crypto bank run, ecosystem collapse, and investor annihilation can blow up this easily around something that was, by crypto standards, regarded as relatively trustworthy, then perhaps the regulators have a point about cleaning things up. In this case, it can benefit the crypto sector as a whole if it comes, through the actions of regulators, to be regarded as less treacherous and unchecked.

The negative take is that the regulators are not simply, as their remit would suggest, distributing the benefits of  regulation  , but rather, that they actively dislike crypto, and would like to regulate away not only the risks but also the innovation, positive disruption and perceived threat to established entities.

In this worldview, even arguments that investors got a raw deal because Terra appeared respectable don’t wash, as it is down to individual participants to look beyond appearances, and inherent problems with algorithmic stablecoins such as TerraUSD had been recognized and commented on.

Decouplings and Separation

A less obvious potential development, in the wake of Terra’s spectacular downfall, is that processes of decoupling within the crypto environment might be given a forward push and occur more rapidly.

After all, why should every section of the blockchain industry be shackled together, rising and falling in unison, when they perform increasingly distinct functions, and in some cases seem not to welcome association with one another anyway?

NFTs and Gaming

The verticals perhaps most likely to decouple quickly are NFTs, along with, relatedly,  blockchain  gaming and metaverse development.

NFTs are tied up with areas of creativity not closely correlated with the financial sector, most obviously, art, collectibles, fashion and design. Blockchain gaming incorporates NFTs and crypto, but it makes more sense for it to be regarded as a sub-division of the gaming and entertainment sector, rather than of the crypto space (or at least, not definingly as part of the crypto space), and metaverse projects, if they are to attract users and gain traction, are likely to go hand-in-hand with gaming.

Ethereum

Whatever exactly it is that Bitcoin will become, and whichever functions it comes to serve, it is apparent that Ethereum is built differently, and will continue to diverge in its uses and functions.

The majority of the largest NFT, gaming and metaverse projects are built on Ethereum, and the Ethereum network functions as the base architecture for independent tech projects.

When Bitcoin is treated as a tech stock, it feels like there has been a misunderstanding somewhere down the line, and that any correlation with the tech industry is a temporary one. In the case of Ethereum, though, correlation with tech feels appropriate, as it is increasingly associated with the transition to and development of web3, rather than with a concept such as sound money, or discussions about Austrian economics.

Alternative Layer 1s

There is an over-saturation of Ethereum-competitor, alternative-layer-1 blockchains, and not all will survive. However, some competitors can carve out their own distinct, separate niches.

In the world of NFTs, the Solana NFT market has been growing in volume, even as Ethereum’s has endured a slowdown. There was a perhaps telling moment recently when a derivative NFT collection was released on Ethereum, copying its content from a successful Solana collection. Usually, this process would have occurred the other way round: there are many Solana NFTs that have copied Ethereum-based collections.

Cardano is firmly established as a rigorous survivor, and networks, such as Avalanche and NEAR Protocol might be more likely to stick around for the long-term if they find areas of specialization through which they are not regarded as being, essentially, slightly different versions of Ethereum.

Bitcoin

And then, finally, there is Bitcoin itself. The fact that a significant number of investors and observers don’t know exactly how to classify Bitcoin is indicative of just how disruptive and profound its presence can become.

As inaccurate as it is to incorporate Bitcoin with tech stocks and traditional finance, it’s almost equally misguided to basket it up with Ethereum, altcoins or NFTs.

Further to this, it would be incongruous if any major mishaps or chicanery initiated by other players swimming in the wider crypto pool, had a lasting or meaningful effect on Bitcoin.

This separation, between Bitcoin and the rest, is perhaps the deepest and most necessary, but as we move forwards, the entire crypto space is likely to experience other internal decouplings.

Reverberations from the Terra ecosystem meltdown, which has seen partner tokens Luna and TerraUSD implode completely, have shaken the entire crypto space. Events were made even more jarring by the timing of events, coming when the macro outlook is ominous and chaotic, and although the worst of the most immediate impact may now be over, knock-on effects and aftershocks are likely to come down the line.

Regulatory interest

One glaring likelihood is that the people and organizations who want to get serious about regulating crypto, now have an opportune moment, immediately after a major protocol has malfunctioned and taken out swathes of investors, from which to get started on those regulations.

A positive take on this would be that if a crypto bank run, ecosystem collapse, and investor annihilation can blow up this easily around something that was, by crypto standards, regarded as relatively trustworthy, then perhaps the regulators have a point about cleaning things up. In this case, it can benefit the crypto sector as a whole if it comes, through the actions of regulators, to be regarded as less treacherous and unchecked.

The negative take is that the regulators are not simply, as their remit would suggest, distributing the benefits of  regulation  , but rather, that they actively dislike crypto, and would like to regulate away not only the risks but also the innovation, positive disruption and perceived threat to established entities.

In this worldview, even arguments that investors got a raw deal because Terra appeared respectable don’t wash, as it is down to individual participants to look beyond appearances, and inherent problems with algorithmic stablecoins such as TerraUSD had been recognized and commented on.

Decouplings and Separation

A less obvious potential development, in the wake of Terra’s spectacular downfall, is that processes of decoupling within the crypto environment might be given a forward push and occur more rapidly.

After all, why should every section of the blockchain industry be shackled together, rising and falling in unison, when they perform increasingly distinct functions, and in some cases seem not to welcome association with one another anyway?

NFTs and Gaming

The verticals perhaps most likely to decouple quickly are NFTs, along with, relatedly,  blockchain  gaming and metaverse development.

NFTs are tied up with areas of creativity not closely correlated with the financial sector, most obviously, art, collectibles, fashion and design. Blockchain gaming incorporates NFTs and crypto, but it makes more sense for it to be regarded as a sub-division of the gaming and entertainment sector, rather than of the crypto space (or at least, not definingly as part of the crypto space), and metaverse projects, if they are to attract users and gain traction, are likely to go hand-in-hand with gaming.

Ethereum

Whatever exactly it is that Bitcoin will become, and whichever functions it comes to serve, it is apparent that Ethereum is built differently, and will continue to diverge in its uses and functions.

The majority of the largest NFT, gaming and metaverse projects are built on Ethereum, and the Ethereum network functions as the base architecture for independent tech projects.

When Bitcoin is treated as a tech stock, it feels like there has been a misunderstanding somewhere down the line, and that any correlation with the tech industry is a temporary one. In the case of Ethereum, though, correlation with tech feels appropriate, as it is increasingly associated with the transition to and development of web3, rather than with a concept such as sound money, or discussions about Austrian economics.

Alternative Layer 1s

There is an over-saturation of Ethereum-competitor, alternative-layer-1 blockchains, and not all will survive. However, some competitors can carve out their own distinct, separate niches.

In the world of NFTs, the Solana NFT market has been growing in volume, even as Ethereum’s has endured a slowdown. There was a perhaps telling moment recently when a derivative NFT collection was released on Ethereum, copying its content from a successful Solana collection. Usually, this process would have occurred the other way round: there are many Solana NFTs that have copied Ethereum-based collections.

Cardano is firmly established as a rigorous survivor, and networks, such as Avalanche and NEAR Protocol might be more likely to stick around for the long-term if they find areas of specialization through which they are not regarded as being, essentially, slightly different versions of Ethereum.

Bitcoin

And then, finally, there is Bitcoin itself. The fact that a significant number of investors and observers don’t know exactly how to classify Bitcoin is indicative of just how disruptive and profound its presence can become.

As inaccurate as it is to incorporate Bitcoin with tech stocks and traditional finance, it’s almost equally misguided to basket it up with Ethereum, altcoins or NFTs.

Further to this, it would be incongruous if any major mishaps or chicanery initiated by other players swimming in the wider crypto pool, had a lasting or meaningful effect on Bitcoin.

This separation, between Bitcoin and the rest, is perhaps the deepest and most necessary, but as we move forwards, the entire crypto space is likely to experience other internal decouplings.

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  • Source: https://www.financemagnates.com/cryptocurrency/terra-aftershocks-regulation-and-decouplings/

This Post was originally published on Finance Magnates

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