A crypto analyst has provided insight into how the structure of the Ethereal ecosystem I could bring bitcoin and the overall crypto market down. His analysis focused on Liquid Stake Tokens (LST), Liquid Stake Tokens (LRT), and stablecoins backed by these tokens and how they could lead to the next “bubble” burst.
Magic money that could lead to the fall of bitcoin
in a mail On his platform able to stake your eth on liquid staking derivatives (LSD) platforms. These users can then use these LSTs on betting platforms where they also earn LRT (liquid repo tokens).
Duo Nine's concern is their belief that this creates “magic money” as these LSTs and LRTs are created out of nothing and get their backing from basically nothing. He also noted that the invention of these LSTs and LRTs is no different from “fractional reserve banking,” where the economy’s money supply expands “out of thin air.”
However, unlike the Bank System, the analyst does not believe that the cryptocurrency market is well equipped to sustain such a mirage, which will cause the bubble to burst sooner rather than later. Duo Nine further referred to this bubble as one that is simply “driven by ponzinomy and the irresponsible creation of money due to greed.”
This is why he is not enthusiastic about LSTs and LRTs like stETH and reETH, respectively, as he does not see them as the best alternative in crypto. Instead, he labels them the “next big bubble or ponzi.” He particularly highlighted the EigenLayer recovery protocolwhich, according to him, should “worry” users.
Stablecoins are in the ethereum mix
Duo Nine also alluded to stablecoins, which are backed by these LRT tokens. According to him, the bubble is about to peak once the cryptocurrency market starts to see these LRTs being used for mint stablecoins. “The bigger the market cap of those shiny new stablecoins backed by LRT tokens, the bigger the bubble.” he further stated.
The crypto analyst also highlighted how these LRT stablecoins are at great risk, considering they get their actual backing from eth. As such, if eth drops significantly, they could be decoupled instantly. In the worst case scenario, these stablecoins could also go to zero, Duo Nine added. He noted that this could lead to a “cascade of liquidations” and panic.
Furthermore, Duo Nine warned about a platform like Blast, the layer 2 network which will use LST tokens and stablecoins backed by these LSTs to provide “native performance”to its users. He explained that a business model like this carries huge risks, as it puts users at risk if an entire network like Blast becomes insolvent due to greed.
To prove his theory about the dangers of such stablecoins, he alluded to The implosion of Terra's UST, causing the algorithmic stablecoin to sell out. Terra is also said to have leveraged magical money to back the stablecoin “while she pretended it was real.” Eventually, greed took over, Duo Nine stated.
<img decoding="async" class="aligncenter size-medium" src="https://www.tradingview.com/x/3vO5lyIa/" alt="Tradingview.com ethereum Price Chart (bitcoin, crypto, Stablecoins, LST, LRT)” width=”3286″ height=”1530″/>
eth price readies to test $3,000 | Source: ETHUSD on Tradingview.com
Why cryptocurrency users should care
Duo Nine explained how this phenomenon can eventually affect native eth holders and cryptocurrency users in general. He highlighted a situation where this LRT bubble grows to $50 billion and only has real backing of $5 billion in eth or even less.
Such an imbalance could cause a market crash in a situation where traders are looking to offset significant portions of their LST and LRT tokens.
The crypto analyst claimed that this would eventually cause the LST and LRT tokens to crash, while the price of eth could also decline significantly. Meanwhile, stablecoins backed by LST/LRT tokens are declassified or reach zero. This drop could also extend beyond the ethereum ecosystem, as cryptocurrency users could consider bitcoin as the “last resort liquidity” in an attempt to get out of their positions.
Featured image of BitPay, chart from Tradingview.com
