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May 2022

The Monthly Ledger Report

By Bryan Wilson, Legal Engineer at Upside
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May 2022
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An overview of the hack that led to the crash in Luna is available here.

Stable and Unstable Coins

The recent instability of stablecoins has caused a ripple of effects within the crypto community. On the one hand, Terra's crash has left some other stablecoins and protocols on shaky ground. On the other hand, as Packy McCormick points out, bear markets provide anew chance to build new forms of organization and new economies. Looking at the spike in popularity of DAOs and NFTs since the last bear cycle, there's at least some for optimism.

A third response to the crash of the algorithmically-backed stablecoins last week is regulation. Notably, the SEC's Hester Peirce says new stablecoin regs need to allow room for failure. And while some "code-is-law"maximalists out there might disagree, regulation could help ground efforts at standardization of stablecoins and lead to increased legitimacy in the eyes of decision-makers throughout the world.

The reason this has becomes such an important area for regulation is because stablecoins come in different flavors. There are stablecoins backed by collateral. These include fiat-backed - stablecoins which are literally backed by a certain amount of reserve currency like $USD; crypto-backed -stablecoins backed by other crypto assets in smart contracts; and, algorithmically-backed stablecoins that use a peg to balance supply and demand to set a given price. The issue that arose with Tether and Luna was not one that is common to all stablecoins. In fact, as it was pointed out over a year ago, this is a problem for algorithmically-backed stablecoins.

Building from the sentiments of Hester Pierce, it is important to allow for a degree of regulatory experimentation while the dust is settling. However, taking a heavy-handed approach or an unclear approach (like the SEChas with the regulation of other crypto assets),are paths that ought to be avoided.Perhaps the best starting point to try and improve understanding across the evolving landscape of stablecoins would be to have definitions for different types stablecoins –fiat-backed, crypto-backed, and algorithmic –and corresponding regulations tailored to the unique strengths and vulnerabilities of each stablecoin.

A New Frontier for Law

Web3 has caused and will continue to cause problems for our legacy legal systems. In the past month, some attorneys were forced to answer thorny issues like "how do I recoup funds from a hacked DAO" and "what happens to the IP of my Bored Ape if the Bored Ape is stolen?"

Courtesy of BuzzFeed.News

Web3 also promises to offer new opportunities and frontiers for legal products and legal services. Following the crash of the stock market in the 20s and the GreatDepression, pioneering lawyers helped to create the mortgage - a financial instrument that made it affordable to own a home without owning all of the money.

With the onerous process for registering a corporation, it was lawyers who helped to create theLimited Liability company as a vehicle for more lightweight ownership. And, more recently, the rise of the Employee StockOption Plan serves as another example of what is possible when lawyers start thinking outside of the box. Now, with the rise of crypto there are new opportunities to program organizations for specific purposes.

For more info, visit Upside.gg/the-ledger.

From DeFi to ReFi

Regenerative Finance (ReFi) is a topic that has become increasingly popular since 2021. ReFi aims to unify efforts in market-based conservation and other forms of ecosystem preservation and includes topics such as scientific research, ecological restoration, public policy and community governance all benefitting from Web3.

The list of Impact DAOs is available in higher resolution here.

Indeed, the promise of Self-Organising Electronic Institutions for Sustainable Common-Pool Resource Management has been around since the 2014 book From Bitcoin to Burning Man and Beyond (edited and contributed to by many friends and colleagues to Upside).

The popularity of ReFi is not only exciting because it is a new flavor of the crypto market that is maturing, but because it promises to rehabilitate some of the environmental problems that all of us must face. It is not, however, a panacea.

In the same way that greenwashing has emerged, owed to divergent standards of measuring and reporting, the ReFi community will need to bring with them a ruthless drive toward efficiency that can unlock the true potential of the technology.

For more on this subject, I recommend checking out:

Mapping of the environmental Web3 ecosystem in October 2021. Courtesy of Louise Borreani.

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