The explosion of Terra’s algorithmic stablecoin UST and local government token LUNA destroyed more than $50 billion in paper value. 4 experts discuss what’s next for the Terra (LUNA) ecosystem after the collapse.
How did the LUNA and UST crisis evolve?
In a matter of days, more than $50 billion in paper value was wiped out from the collapse of Terra’s UST algorithmic stablecoin and local government token LUNA. In what may be the fastest asset destruction event in crypto history, the dramatic explosion of the Terra ecosystem began just a week ago when the UST fell just below the weekend’s dollar peg.
As the so-called algorithmic stablecoin continues to lose par with the dollar, investors rushed to sell their UST holdings in a manner similar to a traditional bank run. According to data from CoinGecko, the token has lost 87% in value last week, last trading at $0.13. Terra’s local government token LUNA also began to crash when UST deviated significantly from its stable price.
As investors rush to burn the UST for LUNA, stablecoin supply has dwindled as LUNA supply ballooned. At one point, the market value of UST surpassed the market value of LUNA, which essentially dropped to zero. As of Friday afternoon, there were more than 6.5 trillion LUNA tokens in circulation, which brought the price of LUNA down to $0.00008231 according to data from CoinGecko.
The sudden drop of UST and LUNA has further fueled fears in the crypto market, which has been shaken by rising interest rates and tightening financial conditions. In defense of the UST’s fixer, the Luna Foundation Guard is believed to have liquidated $3 billion in Bitcoin that it had purchased as reserves for the UST. While the market impact of the liquidation is unclear, the selling pressure has weighed on major cryptocurrencies, including Bitcoin, which fell as low as $26,900 per CoinGecko.
What’s next for the Terra ecosystem?
With talks on a bailout stalled, Terraform Labs CEO and co-founder Do Kwon has proposed relaunching the Terra Blockchain by issuing one billion tokens to be distributed to various stakeholders. For some investors, the collapse of UST and LUNA has pushed the Terra ecosystem beyond a revival, but others believe Blockchain still has a chance to bounce back. Marcus Sotiriou, analyst at GlobalBlock, said:
One way, and perhaps the only way, Terra can rally is to use the Layer-1 Blockchain and its ecosystem while using USDT or USDC as the stablecoin of choice. focus on growth. If the tier one ecosystem grows successfully, then they could potentially pay off. But right now there seems to be little hope for owners of Terra, UST and LUNA.
Indeed, institutional investors on Terra have mostly remained silent as tokens have plummeted to zero. Su Zhu, co-founder of Three Arrows Capital and an early Terra supporter, acknowledged in a Twitter post Friday that the Terra ecosystem ‘must do more to move slowly and safely’ after critics flagged the risks for the stablecoin to be hacked and lose its stability. .
Following Terra’s (LUNA) explosion
After one of the most turbulent weeks in crypto history, investors are becoming concerned about the impact such a collapse will have on the crypto industry. We’ll see if the hedge funds that bet heavily on LUNA go bankrupt, and whether decentralized finance protocols that invest their treasures in Anchor Protocol continue to work.
Already, the IHR meltdown has caught the attention of Treasury Secretary Janet Yellen, who used the event to illustrate stablecoin risks and called for new regulations in her Thursday statement before the House Financial Services Committee. Mitchell Dong, director of crypto hedge fund Pythagoras Investments, comments:
Long-term volatility effects on other stablecoins, including those backed fully by cash or cash equivalents such as USDT and USDC, and overeating with ETH. even collateralized it has more impact on stablecoins like DAI.
Richard Li, CEO of NFT marketplace 4k.com, sees Terra’s rise and fall as more of a ‘short-term speedup’ in the crypto industry. The crypto investor claimed that he invested around $200,000 in UST but did not want to exit his position. “I believe this is a temporary shock to the system, it doesn’t change my long-term strategy,” Richard Li said in an interview.
“The system is designed to enrich investors and the team”
According to Kevin Zhou of Galois Capital, an early crypto enthusiast since 2011, Terra The “box” is designed to enrich insiders as opposed to investors, and many have invested their funds in Anchor Protocol, rewarding them with huge returns of around 20%.
Investors never knew they were competing against the system when they thought Terra’s Anchor yield was designed to allow them to compete with each other for the highest yield on a first-come-first-serve basis . Kevin Zhou’ explains:
But I mean it’s even worse than that, because it’s really not just users competing against users. More like users who think they are competing with other users, but really pour all their funds into the investors and internal team.
Kevin Zhou, Terra’s 20% ROI used to entice users to invest in UST from the sale of massive LUNA stash unlocked during a certain qualifying period
So what would they do to finance their operations and also finance the Anchor Yield Reserve? They’re going to sell large chunks of it to willing investors at a discount of some sort, an annual cliff or some sort of vetting program, something like that.
adds that Terra will use the funds from the sale of LUNA to fund its operations and will also use its yield reserves to complement the Anchor Protocol.
The veteran cryptocurrency enthusiast states that Terra has also received some returns from new users who continue to deposit funds into Anchor Protocol to take advantage of the 20% ROI. Zhou notes that with many users participating in Terra’s returns program, the company began paying investors about $7 million in return on investment, even when it had reserves of around $80 million.
During the interview, Zhou notes that the team had to increase the reserve to $450 million and then gradually run out of funds after more investors entered the program to take advantage of it.
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