A famous experiment that combined math and software to make a digital currency behave like a dollar is collapsing dramatically, posing the biggest test yet for decentralized finance and the willingness of its backers to defend her.
TerraUSD, or UST, is an algorithmic stablecoin, which means it uses a complex combination of code, trader incentives, smart contracts, and a large amount of faith to maintain its peg to the US dollar. It does this by working with a crypto token in the same ecosystem, Luna, which can be traded for UST and vice versa by traders to keep the price of UST where it should be.
The goal of projects like UST is to enable crypto traders to transact easily and quickly without having to leave the digital asset ecosystem, rely on intermediaries, or worry about the value of their coins rising. and go down. By using software to manage the volatility of the token, the opportunities to profit from arbitrage are even greater – DeFi lender Anchor Protocol was known to offer above-market rates of up to 20% to traders willing to deposit UST on its platform. In summary, this is the crypto dream.
A month ago, the future looked bright for Terra and its main backer Do Kwon: a consortium called Luna Foundation Guard aiming to provide guarantees to Luna – then at a record value of $119 – had bought more of 1 USD. 5 billion Bitcoin to consolidate the anchorage of the UST, its members reading like a Who’s Who of crypto. But on Monday, all the mechanisms that were supposed to keep the UST stable weren’t. It fell to a low of 60 cents that day and hit a new low of around 20 cents in another crash on Wednesday, pushing its market value from $18.4 billion to $5 billion. Luna also fell significantly, falling to US$2.35.
After shutting down its blockchain, terraform Labs announced Friday morning AEST that it is restarting it.
“A lot of people were caught off guard,” said Nikita Fadeev, partner and head of crypto fund Fasanara Digital, which cut its risk before the crash. “Everything broke down there. It’s a complete surrender.
Exactly why all of Terra’s carefully planned mechanics failed to do their job remains unclear, and conspiracy theories abound about shadowy actors with untold wealth to play with. But one thing is certain: Kwon will not go down without a fight.
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