The spectacular collapse of the Terra stablecoin threw the whole crypto market into disarray, wiping off more than $200 billion. The value of Luna Terra has plummeted by around 80%, making the coins almost worthless. It’s worth noting that stablecoins operate on the supply and demand principle. To keep its price consistent, every stable currency must be backed by some kind of collateral.
Stablecoins are divided into three categories: crypto-backed, where the token is backed by cryptocurrencies; fiat-backed, where the token is tied to either the US dollar or the Euro; and algorithmic coins, which depend on algorithms to ensure supply and demand and a dollar price. Stablecoins, according to popular belief, are immune to dramatic price changes and general crypto volatility, making them a safer investment. Although Terra isn’t the first stablecoin to decline, this wasn’t the case with it.
Do Kwon, the network’s co-founder has given up all hope of returning the present chain to its previous splendor. Instead, he’s now arguing for a hard fork and a fresh start with a separate cryptocurrency, a dubious strategy with no promises of value recovery for affected investors.
Terra’s Fall – The Sequence of Events
- Since the US Federal Reserve raised interest rates and inflation statistics reached market players, the crypto market has seen a lot of volatility and price fluctuations. On May 6, bitcoin fell 8.4%, while the whole crypto market value fell 7.46 percent.
- Big investors, commonly known as crypto whales, started selling around 285 million UST on Curve, Binance, Anchor, and other platforms somewhere between midnight on May 7 and early morning on May 8. At the same time, they began to short the Luna cryptocurrency.
- Because UST and Luna are linked by an algorithm program, as previously described, this enormous selling and shorting threw the balance off. At the end of the day, UST had lost its 1:1 ratio and was trading at $0.98, while Luna was down 6% at $76.51.
- On May 9, the Luna cryptocurrency had lost 60% of its value and was selling at $45 a unit. TerraUSD also failed to sustain its 1:1 ratio, and it continued to fall, reaching a low of $0.6841 at one time.
The Luna Foundation Guard (LFG) and Terra’s creators intervened to stop the rapid decline of their Stablecoins and tokens. LFG said in a series of tweets that they would loan $750 million in Bitcoin (BTC) to over-the-counter (OTC) trading companies and other market makers on the condition that they repurchase it as soon as market circumstances improve.
Lessons to learn
Now is an excellent opportunity for everyone in the crypto world to reconsider their beliefs regarding stablecoins, investment, and development. Here are some of the significant lessons we can learn from the Terra network’s corpse.
Reserves must be stable for assets to be stable
Stablecoins are aimed to combine the best of both the new and old financial worlds: cryptocurrency’s decentralization and speed with fiat currency’s value stability. TerraUSD was an algorithm-backed stablecoin. Unfortunately, it used an alternate paradigm, in which the token was backed by cryptocurrency – particularly LUNA – rather than dollars. If UST had been backed by an asset with a larger market and less unsteady value under pressure, this issue would have been avoided.
Cryptocurrency isn’t wholly decentralized
Terra’s developers made a lot of noise about how they would create “decentralized money” for a “decentralized economy.” When it came down to it, however, the community’s extraordinarily centralized and opaque governing system was exposed.
Invest in quality rather than hype
Simply because something has a high market value does not imply that it is a safe investment. Do not put your trust in the “knowledge” of the hungry, bullish crowd to advise you where to put your money. Make your own investigation. This point cannot be overstated. In hindsight, Terra’s demise was caused by a faulty stabilizing mechanism that was exposed to everybody to view and criticize from the beginning. Previous coins with similar stabilizing mechanisms have been attempted — and failed – for many years.
Continue to be modest
It’s amusing to see organizations collapse, particularly when they’re led by individuals who were previously openly arrogant and confident. Take it straight from Do Kwon. Just a few days before Terra’s collapse, he chatted with a prominent streamer about the crypto sector, suggesting that witnessing 95 percent of industry firms perish over time would be “fun.” His actions impacted more than just him: Kwon was Terra’s most powerful leader, for better or ill. He has been entrusted with the implied duty of steering the community out of a catastrophe. If Terra’s demise had been a true black swan event, Kwon might have been able to rescue his reputation from the wreckage.
The Bottom Line
Crypto might usher in a new era of financial innovation. But unfortunately, it also has a severe lack of regulation, along with market manipulation, hacks, thefts, anonymity, lack of transparency, and a reckless FOMO culture.
Unfortunately, nobody will teach you anything, and no one will help you if your investments fail. Take what you can from Terra’s failure and apply it to your other crypto investments to see if you can get a better understanding of how they function.
