As stormwater recedes from this month’s crypto market bloodbath, one blockchain network has been washed ashore: Terra.
The network’s co-founder, Do Kwon, has shunned any attempt to restore the current series to its former glory. He is now advocating for hard forks and starting fresh with a different cryptocurrency – a highly questionable approach that has no guarantees of recovery of value for damaged investors.
What is certain, however, is that neither the TerraUSD (UST) nor the LUNA governance token will ever recover. The former now trades more than 90% below its intended dollar peg, while the latter has suffered arguably the most explosive and sudden collapse in currency history.
Financial implications of this magnitude are almost unheard of – even in crypto. How could the billions of dollars stored within such a widely supported protocol be completely wiped out within a week – at least not from so-called “stablecoins”?
Now would be a great time for the entire crypto community to re-examine their assumptions about stablecoins, investments, and developers. Here are five valuable lessons we can learn from the zombies left behind by the Terra Network.
1. Fixed Assets Requires Fixed Reserves
Stablecoins are designed to provide the best of the financial world, both new and old: the decentralization and speed of cryptocurrency and the price stability of fiat currency.
However, the most successful stablecoins available right now do not use a fully “decentralized” model. Tether (USDT) value backs its stablecoin with non-decentralized, highly liquid, stable reserve assets (commercial paper, Treasury bills, etc.). These reserves must be regularly audited by private companies to ensure that USDT is truly fully backed and convertible.
However, TerraUSD was an algorithmic stablecoin. It followed an alternative model by which tokens were programmatically backed by cryptocurrency – specifically LUNA – rather than dollars.
Any UST holder can redeem his stablecoin for one dollar worth of freshly minted LUNA at any time. Conversely, LUNA holders can always burn their holdings in exchange for a UST calculation equal to the exact dollar value of the LUNA burn. This mechanism created stable arbitrage incentives similar to USDT so that the market cap of the stablecoin could always be redirected to a dollar.
However, unlike USDT, the asset “backed” by UST was not nearly as stable nor liquid as the real dollar. In other words, if multiple UST holders were to redeem their holdings at once, the value of LUNA could drop significantly once the exchanges were filled with excess supply.
Unfortunately, this is exactly the scenario that happened this month after wealthy UST holders started small attack against stablecoins. Investors were encouraged to collectively redeem their UST holdings for LUNA, therefore creating a greater supply of tokens. The result was a death spiral from which the value and credibility of both the UST and LUNA fell to nothing.
This event could likely have been prevented if the UST had been backed by a deeper market and less volatile value assets under pressure.
2. Buy Price, Not Promotion
Just because something has a high market value, doesn’t mean it’s a reliable investment. Don’t rely on the “wisdom” of a greedy, fast crowd to tell you where your money should go. Do your own research.
This point cannot be stressed enough. In retrospect, the Terra collapsed due to a faulty stabilization mechanism, which was open for all to examine and investigate from its inception. In fact, past coins Similar stabilization models have already been tried – and failed – several years ago.
Such details didn’t make much sense to most investors – nor did the unusually high 20% yield offered to UST holders via Anchor Protocol. When given the opportunity to escape the flood, thousands of investors failed to exercise due diligence.
Even the trusted billionaires of the crypto community entered Terra without a second thought, prompting more to follow. Mike Novogratz, who in January had a Luna-themed tattoo emblazoned on his arm, now calls the artwork “a constant reminder that investing in venture requires humility.”
This month’s events prove that even experienced investors know far less about what is safe in crypto than you do. Don’t trust them.
As bitcoiners say: don’t trust; verify.
3. Crypto Isn’t All “Decentralized”
The developers of Terra made a lot of hype about creating “decentralized money” for a “decentralized economy”. But when the blow struck, the community revealed its highly centralized and opaque governance structure.
Between Do Kwon, Terraform Labs, and Luna Foundation Guard (LFG), the average user had virtually no power during Terra’s final moments. The aforementioned parties made several hasty and monumental decisions in an attempt to save the network – all of which somehow failed.
For example, on May 9, Do Kwon and only six other members of the LFG voted to invest $1.5 billion from their reserve pool to protect the value of the UST. The guard then left the community without any updates until May 16, when he reported that almost all of the reserve assets – including 80,000 BTC – had been sold.
Furthermore, on May 12, TerraForm Labs collaborated with behind-the-scenes validators to freeze the Terra blockchain without warning. This was done without the consent of the community – ironically with the stated goal of “deterring the regime’s attacks”. For reference, Terra’s chain only has 130 validators.
Even Du Kwon himself retweeted Post stating that the LFG was actually a centralized system (which he had planned infection time away).
When it comes to “decentralization”, there is a difference between “can’t” and “can’t”. If a smaller party can control a blockchain network whenever it deems that control necessary, is it really decentralized?
4. Be Humble, Even If You’re Rich
On one hand, kicking a guy while he’s down is bad taste—especially when he’s already facing lawsuits and millions of dollars in fines.
On the other hand, watching companies die can be quite amusing – especially when ruled by people who were once so ruthlessly rude and self-confident.
Don’t take it from me Take it from Do Kwon itself. A few days before Terra’s meltdown, he spoke with a popular streamer about the crypto industry, claiming that 95% of industry startups that die over time would be “entertainment.”
This was no light-hearted joke but a dangerous display of self-determination and condescension to Kwon’s competitors and critics. This became clear in the days to come when Kwon publicly attacked several people who tried to warn him about security flaws in his protocol.
“You can hear influencers whistle for the 69th time about UST depegging, or you can remember that they are all poor now, and go for a run instead,” he said. tweeted on 7th May.
the next day, kwon suggested That those fearing the UST d-peg will be “waiting until the age of men ends.”
Yet Kwon’s worst behavior was in November at the height of crypto’s bull market. When a Twitter user outlined a process by which he predicted Terra would collapse due to a minor attack, the co-founders Called This is the “slowest thread” he will read in this decade. He then deemed the user an “idiot” and invited his “billionaire” followers to try the attack.
If the fall of Terra was indeed a black swan event, Kwon may have been able to save his reputation from its remains. but after repeatedly Joke His critics, for being poor, openly invite whales to make small attacks on the network, and cause $200 million in damages”Condition“On the passing of Luna… is it any surprise that she has followers Lack of empathy,
His actions didn’t affect him alone: For better or worse, Kwon was Terra’s greatest leader. The inherent responsibility of rescuing the community from the crisis has fallen on his shoulders.
But after destroying its own credibility, the crypto scene is largely not prepared Your last resort to unite behind the Hard Fork plan. anything Doubt The legitimacy surrounding the ongoing governance vote for his proposal, assuming the vote has been rigged.
Whether such claims have any merit is beyond the point. Trust is fragile – especially in an industry that is already riddled with scams and bugs. Earning it is an uphill battle, and losing it is as easy as a few stupid tweets.
Conclusion: Learn Now, Not Later
Crypto is home to a potential revolution in financial innovation. It also suffers from a severe lack of regulation, market manipulation, hacks, theft, anonymity, lack of transparency, and a reckless FOMO culture.
Investors who you think they know know what they are buying, in fact, don’t know much more about crypto than you do. Developers who assured you that everything is under control cannot, in fact, control the market surrounding their stablecoin.
Take what you can learn from the failure of Terra, and see if you can understand the inner workings of your other crypto investments a little better. No one is learning for you, and likewise, no one will save you if those investments break down.
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