Terra (LUNA-UST) Fiasco: A Lesson Learned?

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beastion

I love cryptocurrency, novels, technology and pretty much anything that caught my interest... [more]

2 years ago

In community: Cryptocurrency and Blockchain(7b7f)

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A Very Painful Lesson

Many people in the crypto-space realized after the Terra (LUNA-UST) fiasco that even the most powerful coin can fail. UST, Terra's stablecoin, lost the majority of its value following a large sell-off by hedge funds or whales. In a couple of days, the accompanying FUD drives the value of both LUNA and UST to near zero. It was said that over $40 billion was lost in the crash.

The collapse impacted not only Terra's investors, but the whole cryptocurrency market. Overall, the crypto-market lost more than $200 billion as a result of the catastrophic crash, an enormous sum in any case.

The LUNA-UST meltdown was considered the largest in cryptocurrency history, and it has shattered the confidence of many investors and would-be investors. The fall also provided critics of Bitcoin (BTC), and cryptocurrency in general, more ammo to attack cryptocurrencies, the market, and those that supports it.

I didn't invest in LUNA-UST, so I didn't lose any money when it crashed. That didn't mean I wasn't affected, though. No, I lost money when the general crypto-market plummeted as a result of the LUNA-UST fiasco, just like most investors. Seeing the value of one's portfolio drop, whether one is a big-time or small-time investor, is very painful.

I still believe and trust cryptocurrency but I would be lying if I say that my trust wasn’t shaken because of the incident. The same thing can’t be said for those that invested in Terra (LUNA) though. I’m almost certain that many of Terra’s investor is cursing Do Kwon (and his ancestors) even now after losing thousands if not millions of dollars in the collapse of one of the biggest cryptocurrency in history.

The LUNA-UST fiasco is unquestionably an unpleasant (and very painful) lesson for all of us. The lesson, however, served a purpose, no matter how nasty or painful it was.

We now know, for example, that no company or cryptocurrency is too big to fail. A cryptocurrency, no matter how large or seemingly indestructible it is, can nevertheless fail under the right circumstances. This mean that even Bitcoin (BTC) the grand-daddy of all cryptocurrency can also collapse overnight if circumstances permit it.

In Terra’s LUNA-UST’s case, the collapse was the result of the flaws inherent in its algorithm. For example, unlike many other stablecoins on the market, Terra's UST was not backed by fiat currency or Bitcoin (BTC) but Terra's own reserved asset, LUNA. To keep UST's pegged value of $1.00, LUNA must be burnt or vice-versa. Basically, If the value of UST falls below its peg, it is burned and new LUNA is created. If the value of UST is higher than its peg, LUNA is burned and more UST is created.

So when the major sell-off occurred there was an overstock of UST, thus depressing its value and increasing the pressure on LUNA, finally scaring investors into selling their crypto-assets. The failure of UST highlights the flimsiness of algorithmic stablecoin.

Aside from the shaky algorithmic stablecoin, the unrealistic lending protocol that paid 20% interest on UST deposits contributed to the failure as well. The given percentage was deemed unrealistic because more UST must be minted in order to pay the interest, lowering the token's value. When you add in the fact that investors can withdraw and sell their tokens at any given time then you've got a formula for disaster. This was proven when the massive sell-off happened and terrified investors reflexively sold their tokens to minimize lose. Things got so out of hand that the measures implemented by Terraform Lab didn’t stave off the FUD.

Of course, the whales and/or hedge funds that triggered the major sell-off bear the brunt of the blame. Without them, the LUNA-UST catastrophe would not have occurred, and the tokens would still be one of the most valuable to date. Unfortunately, there’s no what ifs in real life, and we cannot change what has already happened. What we can do though is to grow stronger from the painful lesson caused by the collapse of Terra.

What’s Next?

The LUNA-UST debacle underlined the importance of picking the correct cryptocurrency to invest in. Just because a new token appears to be promising doesn't imply it is. A token that has been around for a long time and has weathered the test of time, in my opinion, is more trustworthy than a fresh token that promises an unreasonable return on investment.

In this aspect, cryptocurrencies such as Bitcoin Cash (BCH) provide greater protection and, over time, perhaps greater reward than what is now available on the market. Certainly, lending Bitcoin Cash (BCH) will (normally) not get you that 20% interest, but I prefer that over losing all of my money due to a sudden drop in value any day.