The network's co-founder, Do Kwon, has abandoned all efforts to restore the current chain. He is currently advocating hard fork and starting over with one type cryptocurrency another, a very worrisome approach with no guarantees of value recovery for losing investors.
What is certain, however, is that both TerraUSD (UST) and governance tokens LUNA will never recover. With the work UST transactions are now down more than 90% compared to $ 1, while LUNA suffered the worst collapse in monetary history and had little chance of turning around.
Financial events of this magnitude are virtually unheard of, even in the cryptocurrency market. How can billions of dollars stored in a widely supported protocol evaporate completely within a week, especially for a project called "stablecoins”?
Now is a good 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 disaster Terra.
LUNA collapsed from $ 100 to less than $ 1 | Source: TradingView
1. Stable assets require stable reserves
Stablecoins are designed to offer the best of both the new and old financial worlds: the decentralization, the speed of cryptocurrency, and the stability of value of fiat.
However, the most successful stablecoins currently do not use a completely “decentralized” model. Tether (USDT) backs its stablecoin with reserve assets, which are non-decentralized, highly liquid and stable (commercial paper, treasury bills, etc.). These reserves must be audited regularly by private companies to ensure that USDT is actually fully supported and convertible.
TerraUSD is an algorithmic stablecoin. It follows the alternative model whereby tokens are programmatically backed with a cryptocurrency, namely LUNA, instead of USD.
Any UST holder can redeem their stablecoin $ 1 value of newly minted LUNA at any time. Conversely, LUNA holders can always burn their holdings in exchange for UST equal to the dollar value of the burned LUNA. This mechanism creates a stable arbitrage incentive model similar to USDT so that the market price of stablecoins can always redirect back to $ 1.
However, unlike USDT, the asset "supporting" UST is not nearly as stable and not as liquid as the USD. In other words, if multiple UST holders repurchase their holdings, the value of LUNA could plummet as exchanges run into oversupply.
This is exactly the situation that played out this month, after large UST holders started a short attack against stablecoins. Investors were incentivized to buy back their UST holdings, creating a flood of LUNAs that flooded the market. As a result, a death spiral emerges, with the value and credibility of both UST and LUNA shattered.
This phenomenon could be prevented if the UST were backed by an asset with a deeper market and less value. knife more active when under pressure.
2. Buy value, not hype
A property with a high market value does not mean it is a reliable investment. Don't rely on the "wisdom" of the greedy, bullish crowd to guide your cash flow. Do your own research.
Terra collapsed due to a flawed stabilization mechanism that caused everyone to check and scrutinize all projects. In fact, previous coins with similar stability patterns were tested and failed years ago.
However, these details do not seem to matter much to most investors, as well as the unusually high returns of up to 20% provided to UST holders via the protocol. Anchor. When there was a chance to get out of a disaster before it hit, thousands of investors didn't use due diligence.
Even trusted billionaires in the crypto community have adopted Terra without thinking twice, even inspiring many to join. Mike Novogratz, who has a LUNA-themed tattoo on his arm, now calls the piece "a constant reminder that venture capital requires humility."
This month's events prove that even experienced investors do not know all the aspects of keeping assets safe in the market. crypto. Therefore, investors need to conduct their own research, rather than rely on them.
As Bitcoiners often say, “Don’t trust, verify yourself”.
3. Not All Cryptocurrencies Are “Decentralized”
The developers of Terra were hyped about creating “decentralized money” for a “decentralized economy”. But then, the community revealed the highly centralized and opaque governance structure of the project.
The average user has almost no say in Terra's final moments. Due to Kwon, Terraform Labs and Luna Foundation Guard (LFG) made many hasty decisions on their own in an attempt to rescue the network, and all failed.
For instance, on May 9, Do Kwon and six other members of the LFG voted to deploy $1.5 billion from its reserve capital to protect the value of UST. After that, LFG left the community with no updates until May 16, when it explained that virtually all of the reserve assets, including 80,000 BTC, sold.
Furthermore, on May 12, Terraform Labs partnered with validators to freeze blockchain Terra without warning. This is done without the consent of the community, with the goal of “preventing administrative attacks”. In this situation, the Terra chain has only 130 validators.
Even Do Kwon himself retweeted a post, saying that LFG is indeed a centralized system (which he has been planning to transition since then).
When it comes to “decentralization”, there is a difference between “impossible” and “no”. If someone can control the blockchain network whenever they think necessary, is that control truly decentralized?
CEO Terra – Do Kwon
4. Be humble, even if you are rich
A few days before Terra's crisis hit, Do Kwon talked to a well-known streamer in the crypto industry, claiming that it was quite interesting to watch 95% industry startups collapse in time.
This is not a fun joke but a show off to elevate your project and drown out your competitors. This became even more apparent in the days that followed, when Kwon publicly attacked many people who tried to warn of security flaws in the protocol.
“You can hear a lot of people talking about UST losing its peg, or you might remember, they are all so poor now,” Kwon tweeted on May 7.
The next day, Kwon suggests that those who fear the UST will lose its peg will need to wait "until death" to see the event unfold.
However, Kwon's worst behavior was at the peak of the crypto market in November, when Twitter users outlined the process of predicting that Terra would collapse due to a short attack. Still, the co-founder called it the “most ridiculous article” he had read in this decade. After that, Kwon went on to criticize the user as a "dumb" and challenged them to try hacking the network.
If Terra's demise is indeed a black swan event, Kwon may still be able to salvage his reputation. But after constantly mocking his critics, openly inviting whales to attack the network, shorting the network and losing $200 million in "bets" on the demise of LUNA… Kwon lost sympathy and confidence. information from users.
Kwon's actions not only affect himself, but they also have a negative impact on Terra.
But with no credibility left, much of the crypto market is unwilling to participate in Kwon's eventual hard fork. Some don't even trust the legitimacy surrounding the ongoing governance vote, believing it could be a scam again.
Trust is fragile, especially in a market already rife with scams and scams. Building trust is a challenging and difficult process, but it can be destroyed easily with just a few stupid tweets.
5. Never stop learning
Cryptocurrencies are seen as a potential revolution in financial innovation. However, the market is in a state of lack of regulation, manipulation, hack, theft, anonymity, lack of transparency and culture FOMO.
In fact, many investors do not know anything about the market when making an investment. Developers often make sure that everything is under control, but the truth is that they have no control even with the stablecoin they built.
Learn the hard lessons from Terra's failure and consider each investment carefully. No one can save you if you lose, so do your own research and learn from every market turn.