What happen? The Terra catastrophe exposes flaws plaguing the crypto industry.


Last week was a dark time in crypto history, with the industry’s total market cap dropping to $1.2 trillion for the first time since July 2021. Much of this confusion is due to the time-resolving of Terra, the Cosmos-based protocol that supports the real algorithmic family of stablecoins.

About a week ago, Terra (LUNA) was ranked among the top 10 most valuable cryptocurrencies on the market with a single token. transaction At the price point of $85. However, by May 11th, the asset price had dropped to $15. And after 48 hours, the tokens have lost 99.98% of their trading value at the current price of $0.00003465.

Due to the ongoing collapse, Terra’s other related offering, TerraUSD (UST) (an algorithmic stablecoin pegged at a 1:1 ratio to the US dollar), has lost its peg to the dollar and is currently transaction At $0.079527.

Terra Ecosystem Description

As highlighted above, the Terra protocol is powered by two core tokens: UST and LUNA. Network participants can: UST Bake LUNA In a nutshell on the Terra Station portal, the Terra economy can be imagined as mainly composed of two pools (ie one for TerraUSD and one for LUNA).

To maintain the value of UST, LUNA supply pools are added to or subtracted from the vault, requiring clients to burn LUNA to issue UST and vice versa. All of these actions are incentivized by the platform’s algorithmic marketplace module, making UST’s functional framework materially different from its closest stablecoin rivals, Tether (UDST) and USD Coin (USDC). Both are directly backed by notional assets.

To better describe the operation of UST (or algorithmically stablecoins in general), it is best to use a simple illustration. For example, if UST is worth $1.01, a user can use Terra’s swap module to exchange $1.00 worth of LUNA for 1 UST for a net profit of $0.01.

Now, when the table changes and the UST drops to $0.99, the network user can do the opposite, so the protocol prevents some users from exchanging $1.00 worth of UST for $1.00 worth of LUNA. What was once a fictional scenario is now a living reality, resulting in the collapse of the Terra protocol as well as the tarnishing of the crypto industry’s reputation in the eyes of investors around the world.

Damage management, but to no avail.

With LUNA and UST in freefall earlier this week, the protocol’s co-founder, Do Kwon, released A series of tweets announcing corrective actions to contain further bleeding. As a precautionary measure to counter the UST’s decoupling with the dollar, enforce The incineration of UST as we know it in retrospect didn’t work.

Kwon argued that increasing the default pool from 50 million to 100 million SDR and reducing the PoolRecoveryBlock from 36 to 18 could potentially increase the protocol’s issuance capacity from $293 million to $1.2 trillion.

In a nutshell, by deploying the changes mentioned above, the Terra team was able to: Mint Four times more UST, a process now jokingly called Kwontative easing. While providing an expert opinion on the matter, Jack Tao, CEO of cryptocurrency exchange Phemex, told Cointelegraph that looking back now, disaster signals surrounding UST and LUNA have been around for quite some time.

First of all, he thinks that the general idea surrounding algorithmic stablecoins themselves is very sparse as these offerings have no real backing assets. Second, the Luna Foundation caused a lot of commotion when it recently announced that it would purchase a total of $10 billion in Bitcoin (BTC) to use as a reserve fund for UST. In this regard, Tao added:

“These purchases created an oversupply in UST, which put selling pressure on LUNA and subsequently selling pressure on UST, which started to drop sharply. When this sale occurred, the Luna Foundation Guard had to offload Bitcoin to keep it pegged. However, as the reflex selling pressure continued, all of the related assets began to decline significantly.”

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Tao went on to add that the Anchor Protocol, a savings, lending and borrowing platform built on the Terra Blockchain that promised an unrealistic 20% Annual Return (APY) on UST staking, also played an important role in its development. . When the selling pressure on the UST rose, they lost the $1.00 peg and started dropping uncontrollably.

“As Binance liquidity depleted, Curve’s two UST pools started selling UST, and Anchor’s borrowing level decreased by more than $1 billion. As a result, the wider ecosystem is now struggling with trust issues, especially when it comes to stablecoins.”

Terra is officially taken offline after the collapse.

Validators collectively serving the Terra network on May 12th decided In particular, as the network’s LUNA tokens recently dropped below a penny, we are suspending all digital activity related to the ecosystem to mitigate potential governance attacks.

To date, Terraform Labs’ official Twitter account has revealed that all network activity has stopped at a block height of 7,603,700. As LUNA’s value declined by nearly 100%, a company spokesperson suggested that developers were no longer confident in their ability to prevent third-party governance hacks. However, downtime was brief, and Terra’s core team said they would resume work when validators can apply a patch that disables all additional delegation.

The LUNA/USDT trading pair was delisted from Binance when it fell below the 0.005 USDT mark. The move follows the cryptocurrency exchange Huobi’s removal of the LUNA token just a day ago. Before the above event, UST was the third largest stablecoin by total market capitalization, after Tether and USD coins.

Bad outlook for the industry as a whole

From Tao’s point of view, this entire episode will have a negative impact on the image of the crypto industry, especially in the eyes of investors. In particular, he believes the conflict could force lawmakers to become stricter on decentralized stablecoins and even force many governments to actively explore the creation of their own centralized stablecoins and central bank digital currencies (CBDCs). .

“Unfortunately, the LUNA situation will leave a bad taste in everyone’s mouth. This is because many great altcoins have lost their enormous value. However, a bigger and more important aspect of this development is timing. All of this happened at a time of war in Eastern Europe, limited supply chains around the world, and rising inflation and interest rates.”

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But he admitted that there could be a little silver screen in all of this. Events can result in only the best projects surviving, and most sketch platforms lose a lot of investor interest. “There will be much more scrutiny in the future, and investors will be comfortable choosing to only invest in the biggest cryptocurrencies such as Bitcoin, Ether and Solana,” he said.

So, it will be interesting to see how this story continues and how this event will affect the development/evolution of the cryptocurrency market in general. Adverse financial pressures.



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