The Terra Luna WTF 101
What a crazy week in the world and capital markets! As part of the crypto bear market you may have heard about the Terra foundation and associated UST ‘stablecoin’. If not, this is what last week felt like with almost every coin in red territory while $LUNA crashed to Earth…
This is a very complex ecosystem and story but at Mr. Block we’re all about distilling simplicity out of complexity so we’ve boiled it down to the basics:
What is Terra, $LUNA and $UST?
- Terra is a South Korean-based cryptocurrency. It was founded in January 2018 by Daniel Shin and Do Kwon of Terraform Labs, and according to cryptocurrency website CoinMarketCap, Terra is “a price-stable cryptocurrency aimed at mass adoption”.
- Luna is also a cryptocurrency whose value is tied to the Terra stablecoin Terra, in turn, is supposed to be tied to the United States dollar.
- UST is the algorithmic stablecoin associated with the project.
What exactly is a stablecoin? What is an algorithmic stablecoin?
- A stablecoin is a digital asset designed to achieve price stability with an underlying reserve asset. Tether, USD Coin and DAI are a few examples where the digital asset ‘pegs’ its value to an underlying Fiat currency.
- An algorithmic stablecoin is a specific stablecoin model where the underlying algorithm is used to achieve pricing stability, not actual underlying collateral. This makes them more capital efficient, but as we’ve learned recently poses many other risks.
WTF happened?!
- There is a lot of speculation around the events and mechanisms of Terra’s collapse, but at a high level what we do know is that the peg of UST to USD was broken by developments to the reserve assets associated with the stablecoin. How and why this happened is a more detailed conversation that again, involves a lot of speculation.
What does this mean going forward?
- It seems the current foundation plan is to keep the chain running for about another month to allow remaining governance mechanisms to play out and allow users to extract final assets.
Open questions include:
- understanding what is fact vs unknown speculation? (intentional manipulation of the market vs. poorly designed protocols, etc.)
- Is the network being shut down, and if so, why?
- How decentralized was this model to begin with?
- What other organizations are impacted?
- What does a potential recovery look like if even possible?
- How does this affect other chains/the market as a whole?
- What will the impact be on the regulatory environment and scrutiny?
- And finally, is there a silver lining? What have we learned, how can the industry improve?
This is not the first, and will not be the last major shakeup for the cryptocurrency industry so it is important to keep in mind that markets are cyclical and innovation and ethics win long term.
Hopefully, investors are presented some attractive buying opportunities and builders will have time and space to learn from past lessons and deliver even more compelling products to market.
Your friend in crypto,
Mr. Block
