‘I Lost All My Life Savings’
If you or someone you know has lost money as a result of the LUNA/UST collapse, remember that life is worth continuing.
The UST and LUNA collapses were devastating, yet there is still hope for crypto. The broader ecosystem was undoubtedly harmed when a prominent stable coin and the token that backs it collapsed, yet it has persevered.
First and foremost, it must be mentioned that a large number of regular, hard-working people have lost money as a result of the recent crypto market crisis. Some people lost their entire savings. While money isn’t everything, losing a significant amount of it can feel that way. Simply said, a loss of money translates over to a loss in personal capital, which can often be a loss in the standard of life.
Very recently, terraUSD (UST), a cryptocurrency that is supposed to remain at a value of $1, also known as a stablecoin, has lost its value. It’s usually not a good sign when something is meant to be $1 but isn’t. Furthermore, LUNA, the cryptocurrency that underpins UST, has lost nearly all of its value. As these losses have been widely reported, this is most likely the umpteenth article you’ve read about the UST .
Stablecoins are a type of cryptocurrency that exists. The value of stablecoins is expected to be $1. Most of the time. They are occasionally €1 or ₩1, but not that’s not always the case either. See, the dollar’s hegemony is to blame. Stablecoins exist so that crypto-natives can quickly move in and out of the dollar without requiring a bank's approval. Stablecoins facilitate the majority of crypto trade volume and fuel the “DeFi” or decentralized finance crypto carousel. More notably, those living under totalitarian governments that encourage hyperinflation utilize stablecoins.
Stablecoins come in a variety of varieties, including tether (USDT), USD coin (USDC), Binance USD (BUSD), and Dai (DAI). The list also includes the terraUSD (UST), which was fairly notable. These are the five largest stablecoins, summing up to a combined worth of $160 billion. Three of these stablecoins (USDT, USDC, and BUSD) are centralized collateralized stablecoins. These entities own a treasury of dollars that back each coin, allowing the holder to redeem the coin for $1 from the issuer.
DAI is unique in that it is backed and collateralized by a diverse portfolio of crypto assets. Instead of being issued by a single institution, DAI is managed by MakerDAO, a decentralized autonomous organization, also known as DAO. DAI is collateralized with crypto rather than dollars, but it is overcollateralized, which is essential in knowing.
UST is even more distinctive. It is not at all collateralized. The Terra protocol powers this algorithmic stablecoin. It is instead backed by the LUNA crypto coin:
The protocol incentivizes users to burn (destroy) LUNA and mint (create) UST when the price of UST is excessively high (>$1). The protocol encourages users to burn (destroy) UST and mint (create) LUNA when the price of UST is too low ($1).
On the surface, this is quite ingenious and relatively straightforward. If there is enough demand for UST to raise its price to $1.01, the protocol prints UST in exchange for releasing LUNA.
The issue is that it works until it does not.
And it sure stopped working on Monday.
If the drastic drop hasn’t alarmed you already, that’s supposed to be $1, not ¢11. Yet, the LUNA chart somehow looks worse.
Naturally, you may suspect that the mechanism has malfunctioned.
It was not broken. It worked as intended as evidenced by the amount of LUNA that was issued when the protocol attempted to algorithmically bring UST back to $1 as LUNA’s price plummeted.
That’s correct. On May 5th, the total quantity of LUNA tokens increased from around 725 million to around 7 trillion. LUNA, on the other hand, has lost 99.9% of its worth.
Terraform Labs (the firm behind Terra) worked on a plan to buy $10 billion in bitcoin and other crypto-assets through the LFG as a backstop in case something like this happened, as previously indicated. However, the issue prevailed as UST was not fully collateralized, unlike
the other top 5 stablecoins. Prior to the collapse, UST’s market value was $18 billion, significantly exceeding the foundation’s reserve of over $4 billion.
To put it into perspective, here’s Bloomberg’s Matt Levine’s statement:
Five years from now, if every cryptocurrency goes to zero … Well, I don’t know what the next five years will be like, but a plausible story (as of last week anyway!) is that there will be continuing integration of crypto into the real economy. More crypto companies will be big and important and intertwined with other companies; their stock will be in the indexes and they will borrow money from banks and use their own money to finance real businesses. … Crypto platforms will be used for real economic activity; ordinary people will invest their savings in those platforms, and those investments will be used to finance real, non-crypto business activity.
On the bright side, bitcoin did not fully collapse. During the wild rush to get UST back to $1, over 80,000 BTC from that over $4 billion treasury was potentially sold. While it can’t be confirmed whether the bitcoin was actually sold, it was forwarded to exchanges. Sure, there was a price reaction, but the encompassing crypto market also dropped as a result of bad news about a major crypto project (LUNA was once the 10th most valuable cryptocurrency).
When you consider the uncertainty in the macroeconomic factors and the general risk-off mentality in the market, it’s nearly unbelievable that bitcoin still has a market cap of over $500 billion.
Given the exceptional bull market of the last 13 years, it can be assumed that we have become desensitized to high numbers, therefore this reiterates the issue. Bitcoin was a worthless, peer-to-peer electronic monetary system invented by an anonymous person in 2009. Despite the fact that no major corporation or government has invested in its marketing, research, or legal services, it has grown into a significant macro asset on which influential politicians and financiers feel compelled to remark.
Bitcoin is not going anywhere. Crypto isn’t either. They’re serious macro assets that can withstand massive selling volumes and still not disappear. This can be a beneficial thing as long as we learn from it.
But, if history is any guide, we must guard against overconfidence so that we don’t get the best of the “future us.”
Works Cited
https://indianexpress.com/article/explained/explained-luna-crash-cryptocurrency-stability-7916591/
https://www.independent.co.uk/tech/terra-luna-ust-crypto-price-crash-b2076655.html
