Babel Finance turns to a stablecoin-based DeFi exchange and lending project to fill a $766 million trading hole. But can an arbitrage-backed stablecoin survive in the post TerraUSD era?
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Crypto lender Babel Finance is hoping to dig itself out of a $766 million hole caused by what the firm says were steep losses due to risky trades by embarking on a stablecoin-centered DeFi project.
What kind of stablecoin? A Bitcoin and Ether-collateralized stablecoin that will maintain its dollar peg through arbitrage.
You know, kind of like the UST stablecoin at the center of the $60 billion Terra collapse that turned crypto winter into a deep freeze.
Not exactly like it, mind you. TerraUSD was a pure algorithmic stablecoin that relied on an arbitrage system with its own partner token, LUNA. When trouble started, developer and Terraform Labs CEO Do Kwon tried — unsuccessfully — to shore it up with a Bitcoin reserve fund.
And also committed securities violations and fraud, and cashed $100 million out of a 10,000-BTC fund intended to stabilize terra/LUNA, the SEC alleges.
Hoping for More
Babel's hopes are centered on the HOPE stablecoin, which will be used on decentralized finance platforms like HopeSwap, a decentralized exchange modeled on Uniswap, and a peer-to-peer lending platform.
Initially backed by a reserve of BTC and ETH, HOPE will rely on market makers and arbitrage traders selling HOPE at a (very small) premium when there is more demand for newly minted stablecoins and buying it at a discount when there is less demand and burning tokens.
Ever since Terra's collapse, governments have been pushing for stablecoins to be backed 100% by cash or near-cash investments like short term U.S Treasury Bonds. That has been a theme of U.S. stablecoin regulation talks that are expected to come to fruition this year.
Breathing Room
Babel has applied for a new six-month moratorium application holding off creditors, it said in a release Monday.
The company blamed its freeze on withdrawals last June on risky trading by a single executive who the company said lost $524 million in company and customers' tokens in risky trades, and another $224 million to collateral liquidations.
Like many other centralized crypto lenders crushed by the crypto winter — a fair chunk of which can be traced back to losses suffered because of the terra/LUNA collapse — Babel is hoping it can dig itself out.
Whether HOPE will be able to do that remains to be seen.
