Crypto VC Thoughts: The Death of Terra

If you witnessed how the Terra collapsed, it would be similar to any Defi projects. So it is unsustainable if you really take a deep look at Defi projects and their founders/creators.

What Luna did is similar to the subprime crisis in 2008. The bank issued a loan and packaged it to become the ultimate solution of financial product to hope no one found out and continued generating amounts of cash until it blew. 

Like Terra, the token $Luna is a debt of UST to sell and fund more UST until the market collapses by itself. 

It is called a death spiral. 

Such a scenario brought down banks in the 1929 stock market crash, Defi Iron finance, and Terra. 

It is a classical liquidity problem that the bank went too far with their debts, and users want to cash out all their assets at once and for all. 

You face the problem of running out of cash faster than selling your debts, and there are not enough buyers in the market to purchase your debts.

Why is the founder (Do Kwon) so confident in resolving such concerns? He did not. Everyone warns him, and he simply pushes people away. 

It will not work eventually when things are too complicated to understand and easily explained in crypto.

And more questions about how Terra handled the situation more like a centralized command to execute the one-way solution that led to total collapse on a price and the ecosystem that supposes to sustain the disaster of the single point failure. 

It did not work as it was supposed to be 😭. 

Lacking transparency is another factor in bringing down Terra.

During the first crash of UST, Luna Foundation Guard (LFG) stepped in to save the UST by injecting BTC. But no one knows if BTC was actually injected until UST collapsed. 

https://twitter.com/TerraLUNADaily/status/1526452087588114432

Terra community proposed to hard fork away UST and issued Luna 2.0.

It is uncertain that people will jump into Luna 2.0 blindly, but regulations are surely coming soon.

Crypto is very risky, and you want to spend time understanding before you jump into believing entirely.