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The collapse of the Terra ecosystem can be compared to the bankruptcy of Mt.Gox, the attack on The DAO, the bursting of the ICO bubble 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 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 newspaper claims. This is another reason to think again about whether innovation is a disguise for excessive leverage.
“Leverage will never make a bad investment a good one, but it often makes good investments a bad one. Last week, we witnessed a decline in exorbitant leverage. UST-LUNA — it’s not just a bad idea, it’s a bad structure. You can’t secure an asset that needs to be a stable, unstable asset.”Mark Yusko, founder of Morgan Creek, said.
Journalists compared the collapse of UST-LUNA with the mortgage crisis of 2008 in the United States. 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 collapse.
“The token was backed by software that few people understood. But the asset was invested because it promised quick enrichment. Much of what seemed to be innovation was actually disguised as something else.”Caitlin Long, head of crypto bank Custodia (formerly Avanti), explained.
A representative of one of the investors in the Terra ecosystem – Lightspeed – said that the venture capital firm viewed the algorithmic stablecoin as a shift in the computer paradigm, and not as a minor offshoot from bitcoin.
The head of another iconic investor in the project, Three Arrows Capital, Su Ju sees the collapse as a problem in implementation, not a mistaken value proposition. The entrepreneur saved the hashtag #LUNA 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 hit the desire to preserve the spirit of decentralization in the face of the dominance of centralized stablecoins USDC, BUSD and USDT.
The community criticized their issuers for the lack of transparency of the collateral. This was especially true with Tether, which invested up to 50% of its reserves in the commercial paper of unknown companies.
As a result of the incident, there was a short-term loss of USDT parity with the US dollar due to the flow of funds to usdC. But by the end of the week, it turned out that some investors left the last asset in fiat.
According to Circle’s chief strategy officer, Dante Disparte, the UST was run by a “wayward and arbitrary” centralized organization under a decentralized flag. Earlier, the head of Terraform Labs Do Kwon promised to “deal with” the competitor DAI launched 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 incident with UST will not lead to a revision of the position regarding the prospects of algorithmic stablecoins. Their best version with provision in the form of fiat is already there.
Confirmation or refutation of this assessment will depend on the market reaction to this sudden shock, according to Forbes. The good news is the restraint of most investors. According to JPMorgan strategist Nikolaos Panigirtsoglu, they began to reduce risks since October 2021.
An additional positive factor is the feeling that ust-LUNA problems will not lead to the “contagion” of the traditional financial market. U.S. Treasury Secretary Janet Yellen agreed. Confirmation is the stability of Tether after a short-term decline in the USDT rate to $0.95.
Journalists stressed that the collapse of UST-LUNA can be an impetus for more responsible forms of innovation in the crypto industry on the example of the stablecoin from Custodia.
Another form of such rethinking, they called the launch of the DeFi protocols Aave and Compound teams focused on institutionalized lending pools. The latter recently even received a rating of “B” from agentsStandard & Poor’s, which can be perceived as “a step in the right direction,” Forbes said.
Recall that the institutional-oriented clearpool landing protocol launched the first private liquidity pool. Its participants were Jane Street Capital and BlockTower Capital.
Earlier, Goldman Sachs analysts noted that algorithmic stablecoins can succeed only if they are widely used in payment transactions.
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