Terra’s rise and fall and what this means for cryptocurrency
Last week, the cryptocurrency world was rocked with the almost vertical crash of the UST stablecoin TerraUSD, and its sister currency Terra (LUNA). From trading at a high of 119.18 US dollars per token this year alone, by May 11, the value of LUNA had plummeted to practically 0, losing 99.99% of its value. With both tokens now near worthless, the impacts of the crash have rippled into the broader crypto market, leaving other coins to also feel the effects of its crash. Just 24 hours following the fall of LUNA, the price of Bitcoin dropped 12%, and Ethereum, another well-known coin falling a further 22%. Thus, the scathing spill over effects of Terra’s LUNA have re-sparked concerns surrounding the future of decentralisation.
Rise of Terra
Cofounded by Kwon Do-Hyung and Daniel Shin, Terra first came to the world’s attention in January 2018.Thus, the UST stablecoin was created with the desire to build a blockchain-based payment system based on usability and stability. Terra effectively raised 32 million US dollars, most notably from crypto-giants Binance and Arrington, and launched in September 2020.
Stablecoins: What are they?
Replicating a traditional financial market, a stablecoin is a type of cryptocurrency made to be pegged to another asset with a stable value (ie: the US dollar). Theoretically, any stable coin pegged to the US dollar, should maintain a value of 1 US dollar per token. Therefore, stablecoins are considered less volatile than other unpegged cryptocurrencies as they and minimise price instability.
Now, the top few stable coins Binance, Tether and USDC are considered ‘collateralised stablecoins’, backed by assets including bank balances, treasuries, commercial papers and so forth. However, Terra UST is an algorithmic stablecoin, meaning it uses arbitrage underpinned by game theory to keep its value pegged to the US dollar.
The stable coin was designed to maintain its peg through a "burn and mint equilibrium" two-token system. Under such a model, UST worked by burning LUNA to create UST when the UST price was above the US dollar, or vice versa, burning UST to create LUNA when the price of UST was below the US dollar. Essentially, this mechanism worked at keeping the value of UST pegged - until well, it didn’t.
Fall of Terra
So, what happened?
Simply put, this complex mechanism sitting on the fine line between push and pull, fell out of tune.
Despite this straightforward explanation, it is hard to pinpoint exactly what happened as multiple factors contributed to the crash (you can read about it in more detail here). However, whatever one’s reasoning be for dumping UST, the mass burning of the coin ultimately caused an inflated supply of LUNA, rendering both coins valueless.
So there, as of May 11, Terra was again brought to the world’s attention, but not for the right reasons. It was only up until last week, Binance’s initial investment in Terra was worth 1.6 billion US dollars, and now it currently sits just under 3000 US dollars. Sadly, this is the stark reality of the situation. Many livelihoods have been lost with near no chance of recovery.
What next?
Undoubtably, the be-all-end-all of the Terra LUNA crash foregrounds concern about the stability of cryptocurrency now, and in the future. The episode has cast doubt across the entire cryptocurrency market, with the true illustration of risk associated with crypto assets - not even stable coins are what they claim to be.
Subsequently, venture capitalists may reassess their risk tolerance for such investments, reducing the possibility of funding needed by future cryptocurrency start-ups to get their feet up and off the ground.
However, for the time being, just consider yourself lucky for not buying LUNA... and sorry to those who did.
Last week, the cryptocurrency world was rocked with the almost vertical crash of the UST stablecoin TerraUSD, and its sister currency Terra (LUNA). From trading at a high of 119.18 US dollars per token this year alone, by May 11, the value of LUNA had plummeted to practically 0, losing 99.99% of its value. With both tokens now near worthless, the impacts of the crash have rippled into the broader crypto market, leaving other coins to also feel the effects of its crash. Just 24 hours following the fall of LUNA, the price of Bitcoin dropped 12%, and Ethereum, another well-known coin falling a further 22%. Thus, the scathing spill over effects of Terra’s LUNA have re-sparked concerns surrounding the future of decentralisation.
Rise of Terra
Cofounded by Kwon Do-Hyung and Daniel Shin, Terra first came to the world’s attention in January 2018.Thus, the UST stablecoin was created with the desire to build a blockchain-based payment system based on usability and stability. Terra effectively raised 32 million US dollars, most notably from crypto-giants Binance and Arrington, and launched in September 2020.
Stablecoins: What are they?
Replicating a traditional financial market, a stablecoin is a type of cryptocurrency made to be pegged to another asset with a stable value (ie: the US dollar). Theoretically, any stable coin pegged to the US dollar, should maintain a value of 1 US dollar per token. Therefore, stablecoins are considered less volatile than other unpegged cryptocurrencies as they and minimise price instability.
Now, the top few stable coins Binance, Tether and USDC are considered ‘collateralised stablecoins’, backed by assets including bank balances, treasuries, commercial papers and so forth. However, Terra UST is an algorithmic stablecoin, meaning it uses arbitrage underpinned by game theory to keep its value pegged to the US dollar.
The stable coin was designed to maintain its peg through a "burn and mint equilibrium" two-token system. Under such a model, UST worked by burning LUNA to create UST when the UST price was above the US dollar, or vice versa, burning UST to create LUNA when the price of UST was below the US dollar. Essentially, this mechanism worked at keeping the value of UST pegged - until well, it didn’t.
Fall of Terra
So, what happened?
Simply put, this complex mechanism sitting on the fine line between push and pull, fell out of tune.
Despite this straightforward explanation, it is hard to pinpoint exactly what happened as multiple factors contributed to the crash (you can read about it in more detail here). However, whatever one’s reasoning be for dumping UST, the mass burning of the coin ultimately caused an inflated supply of LUNA, rendering both coins valueless.
So there, as of May 11, Terra was again brought to the world’s attention, but not for the right reasons. It was only up until last week, Binance’s initial investment in Terra was worth 1.6 billion US dollars, and now it currently sits just under 3000 US dollars. Sadly, this is the stark reality of the situation. Many livelihoods have been lost with near no chance of recovery.
What next?
Undoubtably, the be-all-end-all of the Terra LUNA crash foregrounds concern about the stability of cryptocurrency now, and in the future. The episode has cast doubt across the entire cryptocurrency market, with the true illustration of risk associated with crypto assets - not even stable coins are what they claim to be.
Subsequently, venture capitalists may reassess their risk tolerance for such investments, reducing the possibility of funding needed by future cryptocurrency start-ups to get their feet up and off the ground.
However, for the time being, just consider yourself lucky for not buying LUNA... and sorry to those who did.
