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Saturday, September 30, 2023

Terra: Darkest Week In Crypto History Forces Industry To Look Back At Glaring Flaws In The System

Industry insiders had once touted crypto to be a good investment bet to ride on any potential recession, given its insular nature. But the massacre in the traditional stock market appears to have disproved the theory of crypto-resilience. And the results are dismal, with Terra facing the greatest downside.

The fall has been across the crypto world with both the biggies, Bitcoin and Ethereum, dropping sharply. Coinbase, among the top three crypto exchange platforms, and Robinhood, which supports trading in crypto, and been in a free fall. Even Solano, the popular PoS has seen the value of its coin drop by more than 80% since the November all-time high.

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Understanding The Terra Ecosystem

But the tanking of TerraUSD (UST) was the most glaring. A stake in Terra worth $100 on Monday had sunk to $18 by the morning of Sunday. And its sister token, LUNA, is now worth less than pennies.

The continuing collapse has led to the associated offering of Terra, the TerraUSD (UST) losing its peg to the USD and plunging to $0.079527. This algorithmic stablecoin was pegged at a 1:1 ratio to the USD.

The Terra protocol is thus driven through the use of just 2 core tokens, LUNA and UST. To put it in another way, the whole Terra economy is primarily divided into two pools; one LUNA, and the other UST.

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To maintain the value of the UST, the LUNA pool adds or substracts from the coffers, and clients are obligated to burn LUNA to mint UST, and it is also the other way round. With both LUNA and UST sliding into a total free fall this week, the founder of the protocol, Do Kwon released several protocols as a remedial measure to arrest the bleeding. But it did not work apparently, even though minting 4 times more UST from nothing.

The purchase of a total of $10B worth of Bitcoins to act as reserves for UST resulted in an oversupply, and it started to slide swiftly once the selling pressure mounted on LUNA, and then finally on UST.

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