Terra death spiral: how and why luna and ust crashed
The collapse of the algorithmic stablecoin UST and high -capitalized LUNA token has become a real shock for the crypto industry – in a matter of days the savings of many users and multimillion -dollar assets of large companies have depreciated.
Shortly before the collapse, the Terra ecosystem was inferior in TVL only Ethereum, which includes MakerDao, Uniswap, Compound and other decentralized finance veterans. Anchor platform was in third place of the general rating of Defi Llama.
Terra USD (UST) dizzying growth and the popularity of algorithmic stablecoins inspired many developers to create such projects and backup crypto funds.
However, everything changed in a matter of days: UST suddenly lost a binding to the dollar, and the Luna token associated with it almost depreciated.
FORKLOG figured out the causes of what happened, evaluating the current and possible future consequences for the industry, as well as the chances of the project to restore.
- The collapse of Luna and Ust shook the confidence of the crypto community in the prospects of algorithmic stablecoins.
- The Terra ecosystem has attracted the attention of regulators and mainstream media.
- The collapse of Luna and UST negatively affected the rest of the market, creating serious problems to a number of Defi projects.
Colossus on clay legs
Even at the peak of popularity Luna and Ust were still skeptics, doubtful of the https://gagarin.news/news/could-bitcoin-drop-to-zero/ infallibility of Terra mechanisms. For example, at the end of 2021, the FredDiynolds user in the tweet series warned the community about the vulnerability of the project to well -coordinated attacks using significant capital.
Terra developers suspended the operation of the blockchain several times, explaining this by the need to protect the network from potential “management attacks” and develop a “recovery plan” of the system.
Against the background of the first suspension, Luna traded just above $ 0.01. May 13, when the price of the asset reached $ 0.00006, Binance removed almost all trading couples from Luna and UST from the sport market. Subsequently, the platform resumed trading with these assets in pairs with Busd.
The result of “saving” measures from TerRaform Labs was the expansion of the Luna proposal to an astronomical mark of 6.5 trillion coins. This contributed to a further depreciation of the native project token.
Luna’s huge volatility led to problems with the price display in the decentralized chain of Chainlink, which many Defi projects use to work.
Venus Landing Protocol announced a loss of $ 13.5 million due to ChainLink Oracles settings, which do not allow displaying the price of Luna below $ 0.1.
Venus on #bsc Was Exploited for $ 13.5m Today BecAuse Whoever Set that Min-Price Limit Probably Assumed $ Luna Would Never Collapse So Hard.
Subsequently, the Venus team turned off the protocol for a while, and then launched the VIP-61 proposal to set the zero value of the provision coefficient in the Luna and Ust markets.
Explust the Blizz Finance report on the Avalanche block.
Against the backdrop of universal panic, even the most liquid centralized stablecoin – USDT from Tether deviated from binding. It is noteworthy that his competitor – USDC – was practically unshakable.
The output of ANCHOR assets, with the subsequent collapse of Luna and UST, brought down not only the TVL Terra ecosystem, but also the aggregate indicator throughout the Defi segment.
Some market experts believe that the Terra incident, regardless of the outcome, will have serious consequences for the cryptocurrency market. Blogger Dannis Porter noted that the regulators use UST collapse as the main argument in favor of the total regulation of stablecoins and promotion CBDC .
US Minister of Finance Janet Yellen said that Terra USD unreasoned the need to “create a regulatory framework for stabilcoins aimed at minimizing volatility”.
The representative of the South Korean Party “Strength of the People”, Yun Chan-heen, called for a parliamentary hearings regarding the recent collapse of the Terra ecosystem.
According to some reports, three employees of the legal department of TerRaform Labs were resigned after the collapse of UST and LUNA. It also turned out that one of the leading law firms in South Korea LKB & Partners is preparing to sue the Kwon.
What awaits Terra in the future?
Obviously, the measures taken by the developers only aggravated the situation around Luna and Ust. Their result was the hyperinflation of native token and the complete loss of community confidence in the project and ecosystem.
In the hope of changing the situation, Kwon proposed restraining the network from 1 billion tokens. Soon after the publication of the proposal, he said that he was “murdered” due to the fact that his invention eventually caused a lot of pain to the community.
“I still believe that decentralized economies deserve decentralized money. However, it is clear that in the current form UST will not become such money, ”he wrote.
Kwon assured the community that neither he nor associated organizations “received any benefit from what happened”. The head of Terraform Labs also emphasized that he did not sell Luna and UST against the background of the crisis.
The project of the project proposed to conduct a hard fork and release a new token. The distribution of the latter can be carried out according to the Snopshot of the network made before the collapse of the market.
The initiative also provides for a new mechanism for organizing blockchain and the creation of a pool to repay the algorithmic stablecoin UST.
Binance Head Chanpeng Zhao doubted the expediency of hardcore Terra. In his opinion, the new chain will not have any value.
Zhao also wondered about the use of Bitcoin reserve LFG. According to him, the assets should have been directed to support to UST.
On May 16, LFG representatives reported that as a result of UST purchases, Bitcoin reserves were almost exhausted. Of the 80 394 BTC as of May 7, only 313 BTC remained.
Many have expressed amazement that the giant Bitcoin interventions did not help at all UST.
The $ 3BN in Reservs Were used to Market Buy Ust and It Still Depegged. That’s Crazy.
– Harry (@cryptoharry_) May 16, 2022
Some saw the positive that the first cryptocurrency did not hit after massive sales in an attempt to save Terra.
On May 14, the founder of Ethereum Vitalik Buterin called on Terra to concentrate on compensation to small investors, supporting the idea of Twitter user under the nickname Persiancapital.
A few days before Kwon, he proposed to conduct a Terra hard fork with the advent of a new network and airrrop.
It was assumed that the new network will save the name Terra with the Luna token. The initial blockchain will become Terra Classic with Luna Classic (LUNC), respectively.
The total issue of Luna will amount to 1 billion tokens, the targeted reward for stakeing (inflation) – 7%.
However, during the preliminary voting, most of the Terra community participants did not support the idea of a network hard for.
Terra incident is undoubtedly one of the most high -profile events in the history of the crypto industry. So far, not a single Defi project has reached such gigantic proportions in front of its collapse.
The “saving measures” of the community only accelerated the collapse. The expansion of the Luna proposal to astronomical values did not contribute to the “absorption of UST”, but only provoked hyperinflation.
The chances of getting out of the “death spi” became completely ghostly – the almost empty reserve fund of LFG is confirmation. It remains open and the question of whether it will be possible to at least partially compensate for the loss of investors.
The further prospects of the concept of algorithmic stablecoins are also unclear, given the undermining of confidence due to Terra collapse. The developers of some projects, including the USDD based on Tron, are not going to fold their hands at all. On the other hand, all new algostyblcoins lose their binding.
The path to the revival of Terra, if at all, will be long and thorny. After all, the main problem lies not in the technical component or mechanism of binding to fiat, but in restoring user trust.
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