The collapse of the UST algorithmic stablecoin and the highly capitalized LUNA token was a real shock to the crypto industry — in a matter of days, the savings of many users and multimillion-dollar assets of large companies depreciated.
The meteoric rise of Terra USD (UST) and the popularity of algorithmic stablecoins have inspired many developers to create similar projects and reserve crypto funds.
However, everything changed in a matter of days: UST suddenly lost its peg to the dollar, and the associated LUNA token almost depreciated. Let’s assess the current and possible future consequences for the industry and the chances of the project recovering.
Colossus with Feet of Clay
Even at the peak of the popularity of LUNA and UST, there were still sceptics who doubted the infallibility of Terra’s mechanisms. For example, in late 2021, user FreddieRaynolds warned the community in a series of tweets about the project’s vulnerability to well-coordinated attacks using significant capital.
In general, stablecoins are widely used in different industries. They are tied to the rate of USD, thus it makes everything simple. For example on online gambling real money South Africa casino platforms, a lot of users are gradually moving to use cryptocurrencies. They are faster, more secure and more reliable.
In early May, shortly before the collapse of Terra, the interest rate on deposits at Anchor was reduced for the first time to just below 18%. The decision was intended to smooth out the growing imbalances and solve a number of problems, including the depletion of the project’s reserves.
In response, users began to massively withdraw assets from the protocol. On May 7, Anchor’s deposits exceeded 14 billion UST, and a day later, the figure was already 11.77 billion UST.
When the stablecoin began to decline, an unknown market participant started selling ETH and buying UST. The latter traded below the anchor level, allowing for a profit.
Against the backdrop of these events, the market collapse continued. The price of bitcoin, which began to fall on May 5, was already testing support at the level of $30,000 by May 10. Quotes of most altcoins were declining even more rapidly. Panic grew.
Against the background of the collapse of the crypto market, UST again lost its peg to the US dollar. On the night of May 10, the price of the asset fell below $0.62.
What’s Next for Terra?
Obviously, the measures are taken by the developers only aggravated the situation around LUNA and UST. Their result was the hyperinflation of the native token and the complete loss of community confidence in the project and the ecosystem.
The project community proposed to hold a hard fork and issue a new token. The distribution of the latter can be carried out according to the network snapshot made before the market crash.
The Terra incident is undoubtedly one of the most high-profile events in the history of the crypto industry. So far, no Defi project has reached such gigantic proportions before its collapse.
The future prospects of the very concept of algorithmic stablecoins are also unclear, given the erosion of trust due to the collapse of Terra. The developers of some projects, including Tron-based USDD, are not going to fold their hands at all.
The road to the revival of Terra, if at all possible, will be long and thorny. After all, the main problem lies not in the technical component or the mechanism for linking to fiat, but in restoring user confidence.