The Economist - USA (2022-05-21)

70 Finance&economics TheEconomistMay21st 2022

Climatefinance

Carbonsinks

T

heloamysoilanddensejungleofthe

SumatranrainforestinIndonesiacan

storeanaverageof 282 tonnesofcarbondi­

oxideperhectare.Ifagroupofclimate­

consciousairlinepassengersweretofinda

hectareofsuchforestatriskofbeingcut

downforpalmoilandwereabletostop

that happening, they would offset the

amountofgreenhousegasesemittedby 175

passengers flying, economy class, from

LondontoNewYorkandback.

Demandforsuchcarbonoffsetsisfore­

casttorocketoverthenextcoupleofde­

cades,asbusinessesattempttomakegood

ontheirpromisestoreachnetzerocarbon

emissions.Lastyearanestimated$1bnwas

spentonoffsets.McKinsey,a consultancy,

predictsthatthesizeofthemarketcould

expandbya factorof 15 by 2030 and 100 by

2050.Althoughafewprojects usenovel

technologytosuckcarbondioxideoutof

the air altogether and store it under­

ground,mostoffsetspromisetosubsidise

renewablesorpayforcarbonsinks,suchas

forests,toberestoredorpreserved.Such

“nature­based”offsetscanincludeprotect­

ing wetlands in Colombia, or restoring

peatlandinScotland.

Butthemarketisnotworking.Theprice

ofa carbonoffsetisfartoolow.Theoppor­

tunitycostofleavinglanduncultivatedis

rising.AhectareofSumatranrainforest,

for instance, could produce around 2.5

tonnesofpalmoilayear, andpalm­oil

priceshaverisento$1,520a tonne,from

around$1,000a yearago.Butthepriceof

nature­basedoffsetshasfallenthisyear,to

$10pertonneofcarbondioxide,according

tocontractstradedontheChicagoMercan­

tileExchange.

Deforestation remains economically

rational. Because a palm­oil plantation

stillcapturesaround 170 tonnesofcarbon

dioxideperhectare,leavingthelandun­

cultivatedoffsetsonly 112 tonnes.Anoffset

priceof$10meansthat,if theaccountingis

doneproperly, sellingoffsetsyieldsrev­

enueofonly$1,120—notenoughtocom­

pensate for the potential loss of about

$3,800inannualsalesofpalmoil.Atcur­

rent prices, saysArielPerezofHartreePart­

ners,a tradingfirm,theonlyagricultural

activitythatislessprofitablethanpreserv­

ingforestsisharvestingrubberinWestAf­

rica.Foraslongasthepriceofanoffsetre­

mains below $20,cattlefarming inthe

Amazonwillremainattractive.

Why has the price of offsets fallen?

Offsetmarketsstruggleinthefaceof

surgingcommodityprices

associated with crypto may be newfangled,

but  to  students  of  financial  history,  these

events  look  familiar.  They  resemble  the

confidence 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 offload 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 profit.

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 flight from tether. Those fleeing

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”.Nowthefirm

saysitstokensare“backed100%byTeth­

er’sreserves”.Thisappearstobesomemix

ofcash,Treasuriesandcorporatedebt,but

thecompanyhasrefusedtodisclosethe

details,claimingthatitsassetmixisits

“secretsauce”.

Aswithmanypastbankruns,wherede­

positorsfledtosafety,holdershavesoldoff

terraandtetherandrushedtotokensper­

ceivedtobeofhigherquality.Oneexample

isusdcoin,whichholdsonlycashorTrea­

suries,andpublishesregularauditedre­

portstothateffect.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 financial

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 reflectionofthestin­

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

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May 2022

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