The past week has been a dark period in the history of cryptocurrency, with the total market value of this industry falling to $ 1.2 trillion for the first time since July 2021. The turmoil has been largely due to Terra’s real-time resolution, a Cosmos-based protocol that drives package of algorithmic stablecoins.
About a week ago, Terra (LUNA) was among the 10 most valuable cryptocurrencies on the market, with one token transaction at a price of $ 85. On May 11, however, the price of the property dropped to $ 15. And, after 48 hours, the symbol has lost 99.98% of its value which is currently trading at $ 0.00003465.
Due to the ongoing collapse, another Terra related bid, TerraUSD (UST) – the stablecoin algorithm linked to the US dollar in a 1: 1 ratio – has lost its connection to the dollar and is now trading at $ 0.079527.
Terra ecosystem explained
As mentioned above, Terra protocols are driven by the use of two core symbols, namely UST and LUNA. Network participants are given the opportunity to beat ICT by burning LUNA on the Terra Station portal. Simply put, one can envision the Terra economy as one that consists primarily of two pools: viz. one for TerraUSD and one for LUNA.
To maintain the value of ICT, the LUNA inventory either adds or reduces its funds so that customers have to burn LUNA to beat the ICT and vice versa. All of these features are encouraged by the platform’s unit market algorithm which makes the functional framework of ICT significantly different from its nearest stablecoin competitors Tether (UDST) and USD Coin (USDC), both of which are backed by fiat assets directly.
To better show how UST (or algorithmic stablecoins) works better, it would be best to use a simple image. For example, if the value of UST is $ 1.01, users are encouraged to use the Terra exchange unit to trade $ 1.00 worth of LUNA for 1 UST, which allows them to launder a net profit of $ 0.01.
Now, when the table is turned and UST drops to $ 0.99, Internet users can do the opposite, which is why protocols forbid some users from redeeming $ 1.00 worth of ICT for $ 1.00 worth of LUNA. This once imaginary scenario is now a living reality, leading not only to the dissolution of the Terra protocol but also to tarnishing the reputation of the cryptocurrency industry in the eyes of investors around the world.
Claims control but without success
As soon as LUNA and UST went free earlier this week, Do Kwon established a protocol released a series of thistles in which improvements are reported to prevent further bleeding. As a temporary step to combat the disconnection of ICT to the dollar, Kwon strengthened burning ICT, something we now know in retrospect did not work.
2 / I understand that the last 72 hours have been very difficult for all of you – know that I am determined to work with all of you to withstand this crisis and we will build on this.
– Do Kwon (@stablekwon) May 11, 2022
Kwon argued that by increasing the base pot from $ 50 million to $ 100 million in Special Drawing Rights (SDRs) and lowering the PoolRecoveryBlock from $ 36 to $ 18, the currency of the booking could potentially increase from $ 293 million to $ 1.2 trillion.
Simply put, by applying the aforementioned changes, the Terra team was given the opportunity to knock four times more ICT out of the dry, a process that is now jokingly referred to as Quantitative easing. Jack Tao, CEO of cryptocurrency exchange Phemex, gave an expert opinion on the matter, telling the Cointelegraph that looking back now, the disaster signs around UST and LUNA have been around for quite some time.
To begin with, he believes that the general concept of algorithmic stablecoins in itself is rather sparse as these offers lack any real support. Second, the Luna Foundation had recently been making a lot of noise, with Do Kwon announcing that it would buy a total of $ 10 billion in Bitcoin (BTC) to serve as a reserve for ICT. In this regard, Tao added:
“These acquisitions led to an oversupply of UST, which began to decline rapidly as sales pressure began to increase on LUNA and then on UST. At the time of this sale, the Luna Foundation Guard had to release its Bitcoin to maintain the connection. But the selling pressure continued and all the assets involved began to fall sharply.
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Tao added that the Anchor Protocol – a Terra Blockchain-based savings, lending and borrowing platform – which promised an unrealistic 20% annual percentage return (APY) on an ICT stake, also played a major role in the development. . As sales pressure on ICT increased, it lost a $ 1.00 connection and began to decline uncontrollably:
“When Binance’s liquidity dried up, Curve’s two UST groups began selling UST and Anchor’s borrowing rate fell by more than $ 1 billion. As a result, wider ecosystems have now been plagued by self-confidence problems, especially when it comes to stablecoins.
Terra officially goes offline after the crash, albeit briefly
On May 12, Terra’s certification service jointly served the network online decided to stop all digital activities related to the ecosystem in an attempt to reduce potential control attacks, especially since the LUNA symbol of the network recently dipped under a penny.
At that point, Terraform Labs’ official Twitter account revealed that all network activity had been stopped at a block height of 7,603,700. As LUNA’s value fell by almost 100%, a company spokesman suggested that developers were no longer confident in their ability to prevent third-party intrusion. However, downtown was short-lived, with Terra’s core team showing that it would restart operations as soon as law enforcement could use a patch that would inactivate any further delegations.
As a result of the LUNA / USDT trading pair falling below the 0.005 USDT target, it was delisted by Binance. The move came after the removal of LUNA tokens with Huobi’s cryptocurrency exchange just a day earlier. Prior to the above events, UST was the third largest stable currency in terms of total market value, just behind Tether and USD Coin.
Bad look for the article as a whole
According to Tao, the whole factor will have a negative impact on the image of the cryptocurrency industry, especially in the eyes of investors. In particular, he believes that the collapse could lead to tighter legislators around decentralized stablecoins and could even lead to many governments scrutinizing the creation of their own centralized stablecoins and central bankers of digital currencies (CBDCs), adding:
“Unfortunately, the situation in LUNA will leave a bad taste in everyone’s mouths as this has caused a lot of great altcoins to lose enormous value. But a bigger and more important part of this development is its timing. “All of this has happened at a time when war is raging in Eastern Europe, supply chains are limited globally, inflation and interest rates are rising.”
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That being said, he acknowledged that there could be little silver lining in all of this: the event could lead to only the best projects surviving, as most sketchy platforms lose the interest of large-scale investors. “From now on, there will be much more scrutiny and investors will feel comfortable choosing to invest only in the largest cryptocurrencies such as Bitcoin, Ether and Solana,” he said.
Therefore, it will be interesting to see how this story continues to evolve and what kind of impact this incident has on the development / evolution of the cryptocurrency market as a whole, especially as the traditional financial system continues to be destroyed by increasing amounts of unfavorable financial pressures.
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