The meltdown of one of the biggest experiments in decentralized finance by the Luna Foundation Guard (LFG) has raised concerns on the possible death of cryptocurrency.
In fact, the world's largest cryptocurrency Binance stopped the trading of Terraform Labs' (Luna) and TerraUSD (UST) tokens on Friday when their value dipped to less than a dollar.
(Photo : JUSTIN TALLIS/AFP via Getty Images)
An illustration picture taken in London on May 8, 2022, shows gold plated souvenir cryptocurrency Tether (USDT), Bitcoin and Etherium coins arranged beside a screen displaying a trading chart.
What Happened to Terra?
Last week, Terra's UST stablecoin had already stoked warning signs of instability when it dipped to $0.985. Hence, Luna decided to deploy $1.5 billion in Bitcoin and UST from reserves to revive UST to the U.S. dollar.
This decision was in line with a code-red strategy that Luna had been planning for months. In January, Luna had stockpiled over $3.5 billion in reserves of Bitcoin, Avalanche, LUNA, and UST to aid their token once it decreases below one dollar.
The loaned capital, according to LFG, will be used to buy large amounts of UST to create buy pressure in hopes of getting the stablecoin back to its intended price.
But unfortunately, hours after the loan last Monday, UST persisted in dipping. The next day, the UST's value plummeted to its lowest, and LFG's reserves were already emptied and could not salvage the stablecoin.
Eventually, the UST had decreased to $0.13 by the end of the week, which effectively demolished Terra's native token LUNA and wiped out a staggering $40 billion in value.
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End of Algorithmic Stablecoins: Is Crypto Dead?
According to Bloomberg, if Terra's crash occurred after a few more months of growth, its market impacts could have created decentralized finance similar to the 2008 financial crisis. They clarified that crypto is not yet dead, but the casualties to stablecoins are staggering.
The massive meltdown caused crypto prices to decrease across the board. They eventually stabilized and somehow recovered, but it still knocked $300 billion off of the trillion-dollar market value of the crypto sector.
Bloomberg noted that stablecoins are a significant part of crypto since traders use them as a means of retaining value without quitting the digital asset ecosystem. This also serves as a safe haven in times of volatility for investors and uses them for digital payment. But the crash might have upended all of its significance and caused various troubles for crypto traders.
Hilary Allen, professor of law at American University, told Bloomberg that this could be the "end of algorithmic stablecoins." She noted that the DeFi ecosystem will not work without stablecoins.
Before losing its one dollar value a week ago, UST had an overall market value of around $18.6 billion. During its popularity, co-founder Do Kwon built reserves to aid UST if it hits the rock-bottom of cryptocurrency.
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Written by Joaquin Victor Tacla
