70 Finance&economics TheEconomistMay21st 2022
Climatefinance
Carbonsinks
T
heloamysoilanddensejungleofthe
SumatranrainforestinIndonesiacan
storeanaverageof 282 tonnesofcarbondi
oxideperhectare.Ifagroupofclimate
consciousairlinepassengersweretofinda
hectareofsuchforestatriskofbeingcut
downforpalmoilandwereabletostop
that happening, they would offset the
amountofgreenhousegasesemittedby 175
passengers flying, economy class, from
LondontoNewYorkandback.
Demandforsuchcarbonoffsetsisfore
casttorocketoverthenextcoupleofde
cades,asbusinessesattempttomakegood
ontheirpromisestoreachnetzerocarbon
emissions.Lastyearanestimated$1bnwas
spentonoffsets.McKinsey,a consultancy,
predictsthatthesizeofthemarketcould
expandbya factorof 15 by 2030 and 100 by
2050.Althoughafewprojects usenovel
technologytosuckcarbondioxideoutof
the air altogether and store it under
ground,mostoffsetspromisetosubsidise
renewablesorpayforcarbonsinks,suchas
forests,toberestoredorpreserved.Such
“naturebased”offsetscanincludeprotect
ing wetlands in Colombia, or restoring
peatlandinScotland.
Butthemarketisnotworking.Theprice
ofa carbonoffsetisfartoolow.Theoppor
tunitycostofleavinglanduncultivatedis
rising.AhectareofSumatranrainforest,
for instance, could produce around 2.5
tonnesofpalmoilayear, andpalmoil
priceshaverisento$1,520a tonne,from
around$1,000a yearago.Butthepriceof
naturebasedoffsetshasfallenthisyear,to
$10pertonneofcarbondioxide,according
tocontractstradedontheChicagoMercan
tileExchange.
Deforestation remains economically
rational. Because a palmoil plantation
stillcapturesaround 170 tonnesofcarbon
dioxideperhectare,leavingthelandun
cultivatedoffsetsonly 112 tonnes.Anoffset
priceof$10meansthat,if theaccountingis
doneproperly, sellingoffsetsyieldsrev
enueofonly$1,120—notenoughtocom
pensate for the potential loss of about
$3,800inannualsalesofpalmoil.Atcur
rent prices, saysArielPerezofHartreePart
ners,a tradingfirm,theonlyagricultural
activitythatislessprofitablethanpreserv
ingforestsisharvestingrubberinWestAf
rica.Foraslongasthepriceofanoffsetre
mains below $20,cattlefarming inthe
Amazonwillremainattractive.
Why has the price of offsets fallen?
Offsetmarketsstruggleinthefaceof
surgingcommodityprices
associated with crypto may be newfangled,
but to students of financial history, these
events look familiar. They resemble the
confidence crises that precede bank runs.
Every stablecoin has a mechanism to
maintain its peg. The simplest (and safest)
method is to hold a dollar in a bank ac
count, or in safe, liquid assets like Treasury
bills, for every stablecoin token. The token
can be traded freely by buyers and sellers;
when a seller wants to offload their stable
coin they either sell it on the open market,
or redeem it for its dollar value from the is
suer, who then destroys the token. usdc
and tether use versions of this method.
Others, like terra, are called “algorith
mic stablecoins”, because they use an auto
mated process to support the peg. Their
main distinguishing feature, however, is
in how they are backed. Terra is backed by
luna, a cryptocurrency issued by Terraform
Labs, which also runs terra. The idea was
that holders of terra could always redeem it
for one dollar’s worth of newly minted lu
na. On May 5th, when luna was trading at
$85 a piece, that meant a terra holder could
redeem it for 0.0118 lunas. If for some rea
son terra was trading at less than $1, arbi
trageurs could swoop in, buy a terra, re
deem it for luna and sell that for a profit.
That system worked as long as luna had
some market value. But on May 9th the
price of luna began to slide. And that in
turn put pressure on terra’s peg—causing a
rush to redeem. The supply of luna bal
looned. On May 10th 350m tokens existed.
By May 15th 6.5trn did. As the price of luna
collapsed, terra also went into free fall. Its
price is now hovering at around 10 cents.
Luna is worthless.
Do Kwon, the founder of Terraform, has
tried to resuscitate terra. He has turned the
blockchain off and on again, “burned” to
kens and attempted to split the block
chain. But nothing has worked so far.
Terra’s implosion has had wider and
more worrying repercussions: it has
prompted flight from tether. Those fleeing
may have felt anxious about the lack of de
tail regarding tether’s backing. The compa
nyoncesaiditbackeditstokenswith“us
dollars”,a claimNewYork’sattorneygen
eralsaidin 2021 was“alie”.Nowthefirm
saysitstokensare“backed100%byTeth
er’sreserves”.Thisappearstobesomemix
ofcash,Treasuriesandcorporatedebt,but
thecompanyhasrefusedtodisclosethe
details,claimingthatitsassetmixisits
“secretsauce”.
Aswithmanypastbankruns,wherede
positorsfledtosafety,holdershavesoldoff
terraandtetherandrushedtotokensper
ceivedtobeofhigherquality.Oneexample
isusdcoin,whichholdsonlycashorTrea
suries,andpublishesregularauditedre
portstothateffect.Dai,anotherstablecoin
backed bycrypto andmanaged by algo
rithms,hasmanagedtomaintainitspeg.
Still,thatotherstablecoinshave sur
vivedmightbesmallcomfortif tetherdoes
not.Iftetherreallyisbackedbyilliquidas
sets,orperhapsassetsthathavefallenin
valuethisyear,thenthemoresomehold
ersredeemitstokens,thelessremainsin
thepotforothers.Theimplosionofthe
world’s biggest and oldest stablecoin
would bemuch more catastrophic than
wasterra’s.Tetherisnotonlya financial
bridgebetweencryptoandconventional
money—ie,dollarsinbankaccounts—but
alsobetweenallkindsofcryptopairsthat
aretradedonexchanges.Thethreebiggest
andmostliquidcryptocurrencypairson
Binance, the biggest exchange, for in
stance,arebitcoinandtether;etherand
tether; and Binance’s own stablecoin,
busd, andtether.
Tetherredeemsonlyitsbigusers,who
arepulling$100,000ormorefromitata
time,andeventhenatitsdiscretion.None
theless, redemptions have continued
apaceoverthepastweek.Thelossofthe
pegonMay12thwasa reflectionofthestin
ginessofthatsystem.Smallerholderswho
wantedouthad tosellthetokenonthe
openmarket. Thestablecoinhasnotfully
recovereditspeg.Fora yearittradedator
above $1; since May12th, it has traded
slightlybelowit.Crypto’smostimportant
bitofplumbingisstillleaking.n
Back to Earth
Cryptocurrencies, market capitalisation, $trn
Source: CoinMarketCap
3
2
1
0
2020 21 22
Down a peg
Tether, market capitalisation, $bn
Source:CoinMarketCap
84
82
80
78
76
74
72
May 2022
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