This Is Why Terra Luna Crashed

Unsustainable economics. It was nice while it lasted though.

Millan Singh
Yard Couch
Published in
7 min readMay 12, 2022

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A financial chart showing significant downward movement.
The markets today…Photo by Maxim Hopman on Unsplash.

Back in December, I wrote a story about a blockchain called Terra and why I thought it was the most promising blockchain around. In that story, I included a section on how Terra could fall apart in a theoretical black swan market event, and it seems my worst fears have come true.

At the beginning of February, I wrote another story about why crypto winter was around the corner, though I didn’t know exactly when it was going to happen. My fundamental concern at the time was that crypto was lacking a consumer economy and therefor its whole valuation was way over-blown. Unlike the stock market which is primarily dominated by core human needs like food, housing, utilities, natural resources, etc., crypto seemed like it was trying to build a financial services economy without a consumer economy to base it on top of.

With Terra specifically though, there were some fundamental concerns.

For the uninitiated, TFL = Terraform Labs, the creators of the Terra blockchain who are still very actively involved with its day-to-day operations. And Do Kwon is one of the co-founders of TFL and by far the most well-known (he fashions himself for crypto what Elon is for the business world in this writer’s opinion).

UST Was Never a Great Currency

I won’t go into detail, as I covered all this in my prior story about Terra (linked again), but UST — an algorithmic stablecoin pegged to the USD — was the focus of the TFL team and Do Kwon in proving the value of Terra and LUNA.

To be a good (and valuable) currency, you need basically two things: a relatively stable value and wide usage/transaction volume in a large and diverse economy.

UST had the first part, as its value is based on USD which is a very stable currency in the grand scheme (don’t let recent inflation blind you, USD is quite stable when you zoom out compared to most other currencies).

It seems like Do Kwon and TFL’s plan to satisfy the other requirement of wide usage centered around making UST a standard stablecoin for crypto trading and other cross-chain DeFi use-cases.

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Millan Singh
Yard Couch

Professional Tinkerer, Creative Entrepreneur, and practitioner of A Hero’s Journey. Follow me for tech, crypto, finance, and personal development.