Terra (LUNA) Collapse: 4 Lessons to Learn (Opinion)

A blockchain network has been pushed ashore after a storm in this month’s cryptocurrency market. That’s Terra.

The network’s co-founder, Kwon Do-woo, has failed all attempts to return the current chain to its former glory. He now advocates hard forks and starts fresh with other cryptocurrencies. This is a highly questionable approach with no guarantees of restoring value to the injured investor.

However, what is certain is that neither TerraUSD (UST) nor LUNA governance tokens will be recovered. The former now fell more than 90% from its intended dollar peg, while the latter suffered the most explosive and abrupt collapse in monetary history.

A financial collapse of this scale is almost unprecedented even in cryptocurrencies. How can billions of dollars stored in widely supported protocols evaporate completely in a week, even in so-called “stablecoins”?

Now would be a good time for the entire crypto community to re-examine their assumptions about stablecoins, investors, and developers alike. Here are five valuable lessons we can learn from the corpses left behind by the Terra network.

At $100, it goes to zero in a few days. LUNA. Source: TradingView

1. Stable assets require a stable reserve

Stablecoins are designed to offer all the advantages of the old and new financial world, such as the decentralization and speed of cryptocurrencies and the stability of the value of fiat currencies.

However, the most successful stablecoins available today do not use a fully “decentralized” model. The value of Tether (USDT) backs the stablecoin as a non-dispersive, highly liquid and stable reserve asset (commercial paper, treasury bill, etc.). These reserves should be audited regularly by private companies to ensure that USDT is indeed fully backed and convertible.

However, TerraUSD was an algorithmic stablecoin. It followed an alternative model in which tokens are supported programmatically by cryptocurrencies, specifically LUNA, instead of dollars.

UST holders can exchange their stablecoin for 1 newly minted LUNA dollar at any time. Conversely, LUNA holders can always burn their holdings in exchange for a UST calculation equal to the exact dollar value of the burned LUNA. This mechanism created a stabilizing arbitrage incentive similar to USDT, allowing the market price of a stablecoin to always be redirected back to $1.

However, unlike USDT, the asset backing UST was neither as stable nor as liquid as the real dollar. In other words, if many UST holders redeem their holdings at once, the value of LUNA could drop significantly as the exchange overflows with oversupply.

This is unfortunately the exact scenario that has occurred since the launch of wealthy UST holders this month. short attack About stablecoins. Investors were incentivized to redeem their UST holdings in bulk for LUNA, resulting in an oversupply of tokens. The result has been a death vortex in which the value and credibility of UST and LUNA are meaninglessly collapsed.

This would have been prevented if the UST was backed by assets of less volatile value under deeper market and pressure.

2. Buy value, not hype

A high market value does not make it a reliable investment. Don’t rely on the “wisdom” of a greedy and optimistic crowd to tell you where your money is going. Do your own research.

This point cannot be overemphasized. In retrospect, Terra fell from the ground up with a flawed stabilization mechanism that everyone could scrutinize and scrutinize. in fact, old coins I already tried many years ago using a similar stabilization model, but failed.

These details are unimportant to most investors, and neither is the unusually high 20% yield offered to UST holders through the Anchor protocol. Thousands of investors failed to use due diligence when they were given a chance to avoid flooding before it happened.

Even the trusted billionaires of the crypto community jumped into Terra without a second thought for more inspiration. Mike Novogratz, who got a LUNA-themed tattoo on his arm last January, now describes the piece as “a constant reminder that investing in a venture requires modesty.”

This month’s event proves that even experienced investors know more about cryptocurrencies than you do. You should not rely on it.

As Bitcoiners Say: Don’t Trust. Confirm.

3. Not all encryption is “decentralized”.

Terra’s developers have done a lot of toast about creating “decentralized money” for a “decentralized economy”. However, under pressure, the community has revealed a highly centralized and opaque governance structure.

Between Kwon Do, Terraform Labs, and Luna Foundation Guard (LFG), the average user had virtually no power at the last minute of Terra. The aforementioned parties have made numerous hasty and monumental decisions to rescue the network, but all have failed.

For example, on May 9, Do Kwon and six other LFG members voted to deploy $1.5 billion from the reserve pool to defend UST values. Guard left the community without an update until May 16, until almost all reserve assets, including 80,000 BTC, have been sold.

metropolitan area
Kwon Do, the creator of Terra

Also on May 12, Terraform Labs worked with validators behind the scenes to freeze the Terra blockchain without prior warning. Paradoxically, this was done without community consent, with the stated goal of “preventing governance attacks”. In context, Terra’s chain is 130 validators.

Dokwon also retweeted post LFG is actually a centralized system (he implementation away from time).

There is a difference between “can’t” and “can’t” when it comes to “decentralization”. If a small party could take control of a blockchain network whenever they feel they need control, would it be truly decentralized?

4. Be humble even if you are rich

On the one hand, it’s horrendous to kick him while he’s collapsed, especially when he’s already faced lawsuits and multi-million-dollar fines.

On the other hand, it can be quite fun to watch a company die. Especially when it is ruled by people who were once blatantly rude and confident.

don’t take it from me Take it from yourself. Just days before Terra’s collapse, he was talking to a popular streamer about the crypto industry, arguing that it would be “entertainment” to watch 95% of industrial startups die over time.

This was no joke, but a dangerous expression of self-confidence and humility toward Kwon’s rivals and critics. This became evident when Kwon publicly attacked several people who attempted to warn of security flaws in his protocol.

“It’s the 69th time I’ve heard of a CT influencer depegging UST, or remember that they’re all poor now, and I can run instead.” Tweet May 7th.

The next day, Mr. proposal For those who fear the UST diff, it will be “waiting for the end of a man’s age”.

However, the worst of Kwon’s behavior was the cryptocurrency bull market in November. When a Twitter user described the process in which he predicted that a brief attack would cause Terra to fall, the co-founders said: called It was the “most delayed thread” he had read in this decade. He then regarded his users as “idiots” and invited his “billionaire” followers to launch attacks.

If Terra’s collapse had been a true black swan event, Kwon would have been able to regain his reputation from the ruins. but repeatedly mockery His critics were poor and openly invited whales to attack the network and lose $200 million.bet“On LUNA’s death… his followers lack of sympathy?

His actions didn’t just affect him. For better or worse, Kwon was Terra’s greatest leader. The tacit responsibility of leading the community in a crisis rested on his shoulders.

However, after destroying his credit, the cryptocurrency scene has changed dramatically. unwilling To unite behind his last resort hard fork plan. some even distrust The legitimacy surrounding the ongoing governance vote on his proposal, we believe the vote has been rigged.

Whether such an argument is worthwhile is out of the question. Trust is weak, especially in an industry where fraud and bugs are already rampant. Gaining it is a tough fight, and losing it is as easy as a few silly tweets.

Conclusion: Don’t Learn Later, Learn Now

Cryptocurrency is home to a potential revolution in financial innovation. It also suffers from a serious lack of regulation, market manipulation, hacking, theft, anonymity, lack of transparency and a reckless FOMO culture.

Investors who think they know what they’re buying don’t actually know more about cryptocurrencies than you do. Developers who have guaranteed that everything is under control cannot actually control the market around stablecoins.

Take what you can learn from Terra’s failures and see if you can better understand the inner workings of other crypto investments. No one will learn for you and likewise no one will save you if that investment collapses.

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