What’s next for the Terra ecosystem after the collapse of $LUNA and $UST

What’s next for the Terra ecosystem after the collapse of $LUNA and $UST

  • The implosion of terra’s UST stablecoin and its LUNA token wiped out over $50 billion in paper value.
  • The unprecedented scale and speed of the terra easing dragged the entire cryptocurrency market down.
  • Crypto experts weigh in on what could happen to the ecosystem now that both tokens are close to zero.

In a matter of days, over $50 billion in paper value has been wiped out due to the collapse of terra’s UST algorithmic stablecoin and its native government token LUNA.

In what could be the fastest wealth destruction event in crypto history, the dramatic implosion of the terra ecosystem began just a week ago with UST dipping slightly below its dollar parity over the weekend.

As the so-called algorithmic stablecoin continued to lose its dollar peg, investors rushed to sell their UST holdings in what was akin to a traditional bank run. The token has fallen 87% in the last week to trade at $0.13 at 4:00 p.m. in New York, according to CoinGecko prices.

Terra UST stablecoin price on 05/13/2022


CoinGecko


Once UST deviated significantly from its parity, terra’s native government token, LUNA, also began crashing to earth.

This is because UST’s dollar parity is maintained through an arbitrage mechanism where traders can always burn 1 UST for $1 of LUNA. If the UST drops below $1, a smart trader could buy the UST and exchange it for $1 worth of LUNA, pocketing the difference as profit. Conversely, if UST rises above $1, a trader could trade $1 worth of LUNA for 1 UST.

The problem with the burn and mint mechanism is that it only works if people are willing to participate. To generate demand for UST, terra created the anchor protocol, which offered a fixed interest rate of nearly 20% for UST depositors on its platform. The interest payments have been largely subsidized by the Luna Foundation Guard, the non-profit organization behind the terra ecosystem.

As investors rushed to burn UST for LUNA, the stablecoin’s supply dwindled while LUNA’s supply soared. In a moment, the


market cap

of UST surpassed that of LUNA, which has plummeted to practically zero.

As of Friday afternoon, there were more than 6.5 billion LUNA tokens in circulation, which diluted the LUNA price to $0.00008231, according to data from CoinGecko.

$LUNA price on 05/13/2022


CoinGecko


The precipitous decline of UST and LUNA exacerbated fears in the crypto market, which has been reeling from rising interest rates and tightening financial conditions.

To defend the UST link, the Luna Foundation Guard is believed to have liquidated the $3 billion in bitcoins it had purchased to serve as reserves for the UST. While the impact of the selloff on the market is unclear, the selling pressure has affected major cryptocurrencies, including bitcoin, which fell to $26,900, according to CoinGecko.

What’s next for the terra ecosystem?

With talks over a rescue plan stalled, Terraform Labs CEO and co-founder Do Kwon has proposed to restart the terra blockchain by minting 1 billion tokens for distribution to various interested parties, according to The Block, citing the post by Kwon in a terra forum.

For some investors, the collapse of UST and LUNA has put the terra ecosystem beyond revival, but others believe that the blockchain still has a chance to come back.

“One way terra can bounce back, and perhaps the only way, is to focus on growing the layer one blockchain and its ecosystem while using USDT or USDC as the stablecoin of choice,” Marcus Sotiriou, Analyst at UK-based blockchain. digital asset broker GlobalBlock said in a research note on Thursday.

He added: “If the layer one ecosystem grows successfully, then they could pay off the debt eventually. However, at the moment, there seems to be little hope for Terra, as well as the holders of UST and LUNA.”

In fact, institutional investors in terra have been mostly silent as the tokens plummeted to zero.

Su Zhu, co-founder of Three Arrows Capital and one of terra’s early backers, acknowledged in a Twitter thread from Friday that the terra ecosystem should have “done more to move slowly and safely” after critics pointed out the risks of the stablecoin being attacked and losing its stability.

“This is Terra’s DAO hack time,” Zhu said. “I won’t pretend to know what the future holds, but I will do my part to help.”

The aftermath of the implosion of terra

After one of the most turbulent weeks in crypto history, investors are becoming increasingly anxious about the impact such a downturn could have on the crypto industry.

It remains to be seen whether the hedge funds that bet heavily on LUNA could become insolvent and the decentralized finance protocols that deposited their treasuries in the anchor protocol could continue to operate.

The UST collapse has already drawn the attention of Treasury Secretary Janet Yellen, who used the incident to illustrate the risks of stablecoins and called for new regulations in testimony Thursday before the House Financial Services Committee.

“There are long-term ripple effects on other stablecoins, even ones that are backed entirely by cash or cash equivalents like USDT and USDC, and a larger impact on stablecoins from something like DAI, even though it is overcollateralized. with ETH,” Mitchell Dong, the chief executive of crypto hedge fund Pythagoras Investments, told Insider in an email interview.

Richard Li, CEO of NFT Market


4k

.com, sees the rise and fall of terra as more of a “short-term speed bump” in the crypto industry. The crypto investor claimed that he had about $200,000 invested in the UST, but is not looking to get out of his position.

“I think this is a temporary shock to the system, it doesn’t change my long-term strategy,” he told Insider in an interview Thursday.

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