The bottom line falls from one of the fastest growing crypto blocks, LUNA, which promises to succeed where bitcoin fails. The predictable collapse is horrific in the entire crypto market and is forcing investors to take the cut.
CThe history of rypto is defined by five resets. The first came in 2014 when the only bitcoin exchange in the world, Mt. Gox, it exploded after a hack of almost half a billion dollars. The second, in 2016, was The DAO hack, when it died attacker cheated a clever contract to give him $ 60 million worth of ethereum, worth $ 8 billion a day. Third, in January 2018, it happened when the ICO bubble emerged, since a one -year decline wiped out 60% of the crypto market or more than $ 700 million mostly in the form of useless junk tokens. The fourth took place in March 2020 when crypto lost 40% of its value along with the rest of the global financial markets.
Each reset not only causes market-price capitalization to increase, but also clears the way for rapid innovation. The two largest exchanges in the U.S., Coinbase and Kraken, were developed from the ashes of Mount Gox because CEOs knew that people needed a trusted place to buy bitcoin. The DAO implosion and the ICO crash set the stage for DeFi’s growth and DAO’s current popularity, and it’s hard to imagine a company like Tesla buying bitcoin before Covid.
The fifth reset started last week. It may be the most important. This time, the trillion -dollar market collapse was caused by excessive sales of risky assets and the sudden evaporation of a $ 40 billion digital token called LUNA that supports a $ 16 billion stablecoin, TerraUSD (UST). Unlike the free floating LUNA tokens, each UST is designed to cost one US dollar. The perfect storm of greed and immature technology caused stablecoin to lose its peg, and between May 7 and May 12, an estimated $ 56 billion went poof.
A severe bear market crash in new markets for cryptocurrencies has been almost uncommon. Consider that in the last century the U.S. stock market experienced only five bear markets in which stocks declined more than 30%. Bitcoin is only 12 years old and the cryptocurrency market has had many severe crashes.
At the most basic level, the latest crypto collapse is a reminder of how get-rich-quick schemes can overcome common sense. Excessive capital losses are forcing the industry to assume all concepts of influence in the cryptocurrency market, forcing honestly with ourselves that innovation only uses influence, and can be fatal for all categories. of assets, called algorithmic stablecoins.
Do Kwon, co-founder and chief executive officer of Terraform Labs, at the company’s office in Seoul, South Korea, on Thursday, April 14, 2022. Kwon counted the oldest cryptocurrency as a backstop for stablecoin, which some critics considered. to a ginormous Ponzi scheme.
Woohae Cho/Bloomberg
“Leverage may not make a good investment, but it can, and often does, make a good investment,” said Mark Yusko, founder of Morgan Creek, an institutional and family investment advisory firm. “And what we’ve seen in the last few months, especially in the last week, is just unwinding an unreasonable level of influence. And in the case of the Terra issue from this past week, the LUNA issue, it’s just a bad idea, a bad structure. You can’t guarantee it.” assets, which are supposed to be stable, with unstable assets.
The South Korea -based Terra Foundation seeks to address this by using algorithms to replace many of the techniques that provide stability to the U.S. dollar. When the price goes down, it creates an arbitrage opportunity to trade UST tokens worth less than a dollar for $ 1 worth of LUNA. Theoretically. Blockchain LUNA also hosts a DeFi loan protocol, called Anchor, that pays depositors 20% of the return.
The 2008 Great Recession was triggered by a housing bubble where subprime loans were packaged and sold as new securities with pure ratings. The collapse resulted in a loss of confidence in the market and a domino effect on financial institutions with potential exposure losses. In addition, the TerraUSD stablecoin was considered unreliable — until it collapsed. The losses are magnified because it is backed by some well -known software but piled up because it promises quick riches, said Caitlin Long, former managing director of Morgan Stanley, now building Custodia, a Wyoming -based crypto bank designed from the ground up to make money without influence. “A lot of what we wear as an innovation is actually using other clothing,” he said.
One of Terra’s most notable investors is Lightspeed, a Menlo Park -based venture company with $ 10 billion in assets under management, according to Pitchbook. He was also one of the first VCs to support crypto, invested in Ripple in 2013, and recently increased his total crypto portfolio to $ 600 million. A spokesman for the company struck a defiant tone about what environmental fallout is likely to go down as one of its most well -known investments. “We see this as a larger computational paradigm shift than the ebb and flow of the short -term price of Bitcoin,” the spokesperson said. “We’re doubling down, especially in infrastructure, DeFi and emerging use cases.”
@zhusu
Twitter
The co-founder of another big backer, Su Zhu of Three Arrows Capital, said on Twitter that the collapse of LUNA was rooted in execution, not a fundamental value proposition. Zhu continues to proudly display the hashtag #LUNA on his Twitter profile.
At least Zhu didn’t get a LUNA tattoo on his arm like Galaxy Digital founder Mike Novogratz, another big supporter. There is no word yet on what is planned with the ink.
The tragedy here is that while greed was certainly an important part of the fall of LUNA, its creation stemmed from a desire to protect the ethos of crypto decentralization, which has been abandoned by the burgeoning stablecoin industry. The two largest stablecoins by market capitalization, Tether and USD Coin, have a combined market capitalization of $ 126 billion. However, while they operate on blockchains, they are run by highly centralized companies that have at times been very vague about the assets used to collateralize digital dollar versions. Tether is particularly controversial, as it invests 40% of its assets in anonymous commercial paper.
That said, Tether is one of the competitors that benefited from Terra’s failure. The cryptocurrency behind DAI’s stablecoin, MKR, jumped 38% in the day after the collapse and while Tether briefly lost its hook, it quickly returned to its status as a relatively safe haven. “In the middle of last week, investors rolled out of Tether to USDC for all their stablecoin needs,” said Raghu Yarlagadda, CEO of FalconX. “USDC is being bought at 2.5 times the normal rate. At the end of the week, the most interesting thing is that people were playing from USDC to fiat.
Perhaps the most disappointing competitor is Dante Disparte, chief strategy officer at Circle, who claims that the fall of LUNA is not reflected in the entire stablecoin industry, calling UST a “stable-in-name-only” token. He claimed that the founder of Terra Do Kwon spent more than $ 3 billion in crypto collateral exposing the project as a centralized entity operating under the banner of decentralization.
“Terra’s behavior and landing, really, really flies when faced with the argument that Terra is decentralized because it takes a few people and a few promises on Twitter to dismantle or try to save it,” Disparte said. “And it feels not only centralized, but it feels capricious and arbitrary.”
Not to help, LUNA’s founder, Do Kwon, went out of his way to fight a competitor. In March she was said that was fun, or “entertaining,” to watch the project falter and tweeted that UST would destroy Dai, stablecoin built they launched in 2014.
@stablekwon
Twitter
Other observers, such as Yusko and crypto analyst Yassine Elmandjra of Ark Invest, argue that the stablecoin algorithm will not be successful. While most past crypto resets were triggered by technological issues solved and implemented by other developers, the consensus seems to be that an improvement in this case is already in place: fiat -backed stablecoin. “It may be an exciting realization for many institutional investors and influencers that some of the experimental initiatives being undertaken in crypto are underway,” Elmandjra said. “I think the whole concept of algorithmically stable coins is a promising project that can be done.”
The pace and way to answer these questions will depend on how the market responds to this sudden shock. Crypto has lost more than $ 1 trillion in value over the past six months, which has seen bitcoin drop from a high near $ 70,000 to a low of $ 30,000. Adding even more urgency is the fact that this could be the first macro crypto bear market where institutions such as Tesla have assets on the balance sheet. In fact, MicroStrategy, which owns the world’s largest bitcoin company, with a stockpile of 129,000 tokens with an average purchase price of $ 30,700, is now at a loss for the first time.
The good news here is that generally investors don’t panic, which should be a shock absorber for the market. Ironically, that may be due to the fact that investors were taking money off the table when LUNA and Terra collided. The industry had “some de-risking in the crypto space even before Terra collapsed,” said Nikolaos Panigirtzoglou, managing director of global market strategy at JPMorgan Chase. “The average turnover in bitcoin began in October,” meaning investors began reducing their bets on crypto by the end of 2021.
The future of the flow will be a useful measure of investor sentiment.
One of the other positive news for the crypto market is the widespread belief that the LUNA / UST crash will not cause contagion throughout the crypto ecosystem or bleed into the traditional financial world. In fact, the industry passed a massive test last week when Tether disappeared briefly on Wednesday morning, dropping to $ 0.95 before recovering quickly. Yarlagadda said there were fears among clients that Tether was being shortened by investors deliberately to lower the price, even though the claim has not been proven. If Tether loses its stake, it will be detrimental to the crypto industry and possibly bloodshed in the financial world.
Finance Secretary Janet Yellen agrees with this sentiment. He told a Congressional hearing last week that UST is a unique form of stablecoin that is unlikely to affect the wider financial world.
It would be nice if this saga became a cautionary tale of excess and led to a more responsible form of innovation in the crypto industry. One trial case was a novel financial institution developed in Wyoming, where Caitlin Long’s Custodia was just one of several banks that wanted to introduce a form of responsible finance by refusing asset rehypothecation – namely, deposits and loans. to the debtor. They even want to offer their own stablecoin.
There is also growth in the DeFi space, which has for years had to deal with allegations of nothing more than Ponzi schemes. This is trying to be more company friendly. The two main platforms, AAVE and Compound, both introduced versions only available to institutions, and the Compound offer even received a B rating from Standard & Poors. This is not investment class, and the protocol only has about $ 150 million in management, but this is the right move.
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