Will the stablecoin bounce back or hoist the white flag? Read on.
“I love chaos”, tweeted Terra Founder, Do Kwon, just a few days before his crypto crashed to zero. For him, watching companies crumble during the crypto crash was “entertaining”…until his own did, leaving him “heartbroken” and broke. Whether he jinxed or calculatedly brought this misery upon himself is yet to be ascertained. But there’s no getting around the fact that Terra’s crash was an eye-opener for stablecoins, which are always supposed to remain “stable” in value as they are pegged to a fiat currency, like the U.S. Dollar.
Terra started as a crypto ecosystem which grew to be worth over US$60 billion. Now, it has become a cautionary tale for cryptocurrencies as its value has reached US$0 as of writing. Here’s a look at Terra’s rise, fall and uncertain future.
The rise of Terra LUNA
Launched in 2018, Terra, or Terraform Labs, was one of the most talked about projects in the blockchain industry, as it had the potential to disrupt the entire payment industry. It was founded by Do Kwon and Daniel Shin. The team behind Terra consisted of experienced professionals from companies, like Google and Facebook. The project was backed by some of the biggest investors, including HashKey Digital Asset Group, Divergence Digital Currency Fund, and Huobi Capital.
Terra rose to popularity with the launch of their mainnet and their tokenomics. Its governance token LUNA and stablecoin UST are algorithmically tied together so that UST maintains its peg to the U.S. Dollar. The price of LUNA tokens slowly started to rise as more and more people started using the platform. The idea was to use UST as a means of payment on the Terra network. This would help reduce volatility and make payments on the network more stable.
Along with that, the platform had the support of Anchor, a lending program, which promised people an annual percentage yield (APY) of 20 percent with Terra. Given that, 72 percent of Terra was stored on Anchor. However, the lending program was already infamous for its lack of sustainability owing to the low number of users.
What happened to Terra in May 2022?
Come May 2022, the crypto market crashed, and Terra USD (UST) lost its peg to the U.S. Dollar. Following that, Terra LUNA fell, too. While LUNA’s value fell to US$0 from US$119 in April, the overall market suffered losses to the tune of US$300 billion. Since the values of UST and LUNA are interdependent, meaning that one’s value will affect the other’s. This system relies on investor demand, stock market volatility and price information. It is out of Terra’s control, which may be why Kwon could just watch as his crypto fell.
As a result of the crash, both big and small investors lost money, with many losing their life savings. One Korean investor who has been investing in crypto since 2017 put in US$800,000 into Terra LUNA, only to lose it all. He went knocking on Kwon’s door seeking answers but was arrested. This fall also doomed some of the startups built on Terra’s platform.
In response to this crash, top crypto exchanges, like Binance and OKX, have delisted Terra LUNA from their platforms. Binance CEO Changpeng Zhao explained his decision, “Some of our users, unaware of the large amounts of newly minted LUNA outside the exchange, started to buy LUNA again, without understanding that as soon as deposits are allowed, the price will likely crash further. Due to these significant risks, we suspended trading.”
Will Terra LUNA recover?
Analysts are unsure. According to the Regional Director of crypto exchange AAX, Anton Gulin, there is a lack of trust among users which will be difficult to regain. He expounded, “Traders and investors suffered tremendous losses and doubt management’s actions that followed the UST unpegging.” By actions, he is referring to the decentralized finance (DeFi) platform’s new plans of a hard fork, i.e. splitting the chain into two: retaining the original chain and building a new one. The CEO and co-Founder of Mudrex, Edul Patel, details, “The existing chain would be known as Terra Classic with its token LUNA Classic, whereas the new chain will be known as LUNA.”
Is that a positive sign? We don’t know, yet. When Kwon polled the LUNA community to gauge how many people were on board with the new plan, over 90 percent voted “no” to going ahead with it. Users want Terra to leave behind the algorithmic component (i.e. the linkage between UST and LUNA) where a problem to one causes problems for another. In fact, Terra’s backers want to get rid of UST, the stablecoin that started the collapse, altogether.
The lack of trust in its system is bolstered by the fact that Kwon may face punishment if its Anchor protocol is found to be a Ponzi scheme.
As of now, any recovery plan for Terra is just a shot in the dark.
Three lessons for other cryptocurrencies
In light of Terra’s downfall, ‘ve roundedded up some takeaways for other cryptocurrencies:
1. Give due attention to your community
Given that the cryptocurrency space is all about being decentralized and community-run, not listening to said community might become your biggest mistake. Today, some are dubbing Kwon’s hard fork approach as “anti-community”. That, together with the existing lack of trust in him, might lead to Terra’s downfall yet again.
And, perhaps, it would be a good idea not to name your supporters “Lunatics”.
2. Learn from your past failures
Kwon was also behind another crypto project, Basis Cash, which failed in early 2021. Then, too, the coin could not maintain its peg with the U.S. Dollar, as was the case with UST. As with most things in business, your past failures can pave the way for your future success, if you choose to learn from them.
3. Practice humility
As a startup founder, eventually, success might get to your head. It might compel you to say sadistic things like, “95% [of coins] are going to die, but there’s also entertainment in watching [them] die, too” and “I don’t debate the poor…and I don’t have any change on me for her at the moment”. Having lost billions of dollars, the market humbled Kwon, and it could very well be you, too.
A final lesson—or friendly tip, rather—for cryptocurrency founders is not to name their children after their crypto, as Kwon did with his daughter, Luna. There’s a reason people advocate for a work-life differentiation; you don’t want reminders of your work at home, especially if you’ve failed at it.
Also read:
- Why Crypto Markets Crash and 5 Ways Investors Can Deal
- The Benefits of Cryptocurrency without the Risk: Stablecoins
- How to Minimize Risks When Investing in Crypto
Header Image by Flickr
