The collapse of the Terra ecosystem can be compared to bankruptcy of Mt.Gox, attack on The DAO, ico bubble burst and the collapse of the crypto market in March 2020. Algorithmic stablecoins may disappear as a category, writes Forbes.
According to journalists, a combination of greed and the immaturity of technology led to the perfect storm.
The incident was another reminder of how get-rich-quick schemes can overshadow common sense, which is still characteristic of the “young” cryptocurrency market, the publication claims. This is another reason to rethink whether innovation is a disguise for excessive leverage.
“Leverage will never make bad investments good, but it often makes good investments bad. Last week we witnessed a reduction in exorbitant leverage. UST-LUNA — not just a bad idea, it’s a bad structure. You can’t secure an asset that should be a stable, unstable asset.”– said Mark Yusko, founder of Morgan Creek.
Journalists compared the collapse of UST-LUNA with mortgage crisis of 2008 in the US. At its epicenter were low-quality mortgages that were packaged and sold as new securities with high credit ratings. Similarly, TerraUSD was considered reliable until its crash.
“The token was backed by software that few understood. But they invested in the asset because it promised to get rich quick. A lot of what seemed to be innovations was actually disguised as something else.”explained Caitlin Long, head of the Custodia (formerly Avanti) crypto bank.
A representative of one of the investors in the Terra ecosystem – Lightspeed – said that the venture capital firm considered the algorithmic stablecoin as a shift in the computing paradigm, and not as a minor offshoot from bitcoin.
The head of another iconic investor in the project, Three Arrows Capital, Su Zhu sees the collapse as an implementation problem rather than a flawed value proposition. The entrepreneur kept the #LUNA hashtag on his Twitter profile.
Some ppl asked me why I am keeping luna in my profile
Its bc i invested in it, believe in the community, and share in the common purpose
The attacks and subsequent de-peg risks were flagged by critics; the fast-growing ecosystem shouldve done more to move slowly+safely
— Zhu Su 🔺🌕 (@zhusu) May 13, 2022
The collapse of UST-LUNA has hurt the desire to maintain the spirit of decentralization in the face of the dominance of the centralized stablecoins USDC, BUSD and USDT.
Their issuers have been criticized in the community for their lack of transparency in collateral. This was especially evident with Tether, which invested up to 50% of its reserves in commercial paper of unknown companies.
The incident resulted in short-term loss of USDT parity with the US dollar due to the flow of funds into USDC. But by the end of the week, it turned out that some investors left the last asset for fiat.
According to Circle’s chief strategy officer Dante Disparte, UST was run by a “wilful and arbitrary” centralized organization under a decentralized banner. Earlier, the head of Terraform Labs, Do Kwon, promised to “crack down” on the DAI competitor launched back in 2014.
By my hand $DAI will die.
— Do Kwon 🌕 (@stablekwon) March 23, 2022
Yusko and Ark Invest analyst Yasin Elmanjra are convinced that, unlike previous “reboots”, the UST incident will not lead to a revision of the position regarding the prospects for algorithmic stablecoins. Their best fiat-backed version is already out there.
Confirmation or refutation of this assessment will depend on the reaction of the market to this sudden shock, according to Forbes. The good news is that most investors are reticent. According to JPMorgan strategist Nikolaos Panigirtzoglou, they have been reducing risk since October 2021.
An additional positive factor is the feeling that the problems of UST-LUNA will not lead to “infection” of the traditional financial market. With this agreed and US Treasury Secretary Janet Yellen. Confirmation is the stability of Tether after a short-term decline in the USDT rate to $0.95.
The journalists emphasized that the collapse of UST-LUNA could be an impetus for more responsible forms of innovation in the crypto industry using the example stablecoin from Custodia.
Another form of such a rethinking they called the launch of Aave and Compound DeFi protocols by teams aimed at institutionalized lending pools. The last one even recently rated “B” from the Standard & Poor’s agency, which can be perceived as a “step in the right direction,” Forbes emphasized.
As a reminder, Clearpool’s institutional-oriented landing protocol launched the first private liquidity pool. Jane Street Capital and BlockTower Capital became its participants.
Formerly Goldman Sachs analysts notedthat algorithmic stablecoins can only succeed if they are widely used in payment transactions.
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