The collapse of Terra’s algorithmic stablecoin, UST, and underlying governance token, LUNA, destroyed more than $50 billion in paper value. 3 analysts and investors discuss the aftermath of the crash and what’s next for the Terra ecosystem.

  • The collapse of Terra’s UST stablecoin and token LUNA has wiped out more than $50 billion in paper value.
  • Terra’s unprecedented scale and speed of unlocking has taken the entire crypto market down.
  • Cryptographers are weighing what could happen to the ecosystem now that both tokens are nearing zero.

In a matter of days, the collapse of Terra’s UST algorithm stablecoin and underlying governance token, LUNA, wiped out more than $50 billion in paper value.

The dramatic collapse of the Terra ecosystem in what could be the fastest wealth destruction event in crypto history began just over a week ago as the UST fell slightly below the dollar peg over the weekend.

As so-called algorithmic stablecoins continue to lose their dollar equivalent, investors are rushing to sell their UST holdings in a manner similar to traditional bank runs. The token was trading at $0.13 as of 4pm in New York last week, down 87%. coin gecko price.

Terra UST stablecoin price as of May 13, 2022

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As UST moved out of the peg significantly, terra’s default governance token, LUNA, also started crashing to Earth.

This is because the dollar peg of UST is maintained through an arbitrage mechanism that allows traders to always burn 1 UST for 1 dollar worth of LUNA. When UST falls below $1, smart traders can buy UST and trade it for $1 worth of LUNA to profit on the difference. Conversely, if UST rises above $1, traders can exchange $1 worth of LUNA for 1 UST.

The problem with incineration mechanisms is that they only work when people are willing to participate. To generate demand for UST, terra created an anchor protocol that offers a fixed interest rate of nearly 20% to UST depositors on the platform. Interest payments were largely subsidized by the Luna Foundation Guard, a non-profit organization in the Terra ecosystem.

as an investor Hurry up to burn UST for LUNA, the supply of stablecoins decreased while the supply of LUNA surged. At some point,

market cap

UST’s share has overtaken LUNA, which has plummeted to essentially zero.

As of Friday afternoon, there were more than 6.5 trillion LUNA tokens in circulation, diluting LUNA’s price to $0.00008231 according to CoinGecko data.

2022-05-13 $LUNA price

coin gecko

The sharp declines in UST and LUNA exacerbated fears in the cryptocurrency market, which has been faltering due to interest rate hikes and tightening fiscal conditions.

To defend against the UST’s peg, the Luna Foundation Guard is believed to have liquidated $3 billion of bitcoins it purchased to use as a reserve for the UST. While the effect of the liquidation on the market is unclear, selling pressure has affected major cryptocurrencies, including Bitcoin. coin gecko.

The next step in the Terra ecosystem

with the bailout stoppedTerraform Labs CEO and co-founder Do Kwon has proposed restarting the Terra blockchain by issuing 1 billion tokens to distribute to various stakeholders. the blockQuoting Kwon’s post on the Terra forum.

For some investors, the collapse of UST and LUNA has made the Terra ecosystem irreversible, while others believe that blockchain still has a chance to make a comeback.

UK-based analyst Marcus Sotiriou said, “One way Terra can recover is to focus on growing the Layer 1 blockchain and ecosystem, perhaps using USDT or USDC as stablecoins. “He said. Digital asset broker GlobalBlock said in a study note on Thursday.

He added, “If the Tier 1 ecosystem grows successfully, it could potentially eventually pay off its debt. But for now, there seems to be little hope for Terra and UST and LUNA holders.”

In fact, institutional investors in Terra were mostly silent as the token plummeted to zero.

Su Zhu, co-founder of Three Arrows Capital and early Terra backer, said: friday twitter thread After critics pointed out that stablecoins run the risk of being attacked and losing pinning, they say the Terra ecosystem “should have done more to move slowly and safely.”

“This is Terra’s DAO Hack “I’m not going to pretend I don’t know what the future holds,” Zhu said. “I’ll do my best to help.”

The aftermath of the Terra implosion

After one of the most turbulent weeks in cryptocurrency history, investors are increasingly concerned about the impact this disruption could have on the cryptocurrency industry.

It remains to be seen whether hedge funds that heavily invest in LUNA will become insolvent and decentralized financial protocols that deposit their assets in the anchor protocol will continue to operate.

Already, the UST collapse has caught the attention of the finance minister. Janet YellenHe used the case to explain the risks of stablecoins and called for new regulations in testimony Thursday before the House Financial Services Committee.

“There are long-term ramifications for other stablecoins that are fully backed by cash or cash equivalents such as USDT and USDC,” said Mitchell Dong, CEO, “and even if over-collateralized with ETH, there are additional implications for Algo stablecoins such as DAI. “He said. An executive at crypto hedge fund Pythagoras Investments told Insider in an email interview.

Richard Li, CEO of NFT Marketplace, said:


.com sees Terra’s boom and bust as “short-term speed bumps” for the cryptocurrency industry. The cryptocurrency investor has invested about $200,000 in UST, but has insisted that he has no intention of withdrawing from his position.

“It’s a temporary shock to the system,” he said in an interview on Thursday. “It doesn’t change my long-term strategy.”

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