Terra Crashes Back to Earth in Unfortunate Death Spiral

May 17, 2022
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Most if not everyone in and out of the crypto space has heard about the debacle that occurred with UST over the last couple of weeks. We’re going to explain a little bit about what happened to it so you can get a better understanding. The “death spiral” that UST had, began on May 9th, and is specific to algorithmic stablecoins requiring a very specific set of circumstances to occur.

The Step-By-Step Death Spiral of Terra UST

So let’s take a look at what happened to UST exactly:

  1. On May 7th, over $2 billion dollars worth of UST was taken out of the Anchor Protocol (a savings, lending, and borrowing platform) that was built upon the Terra blockchain, along with hundreds of millions of UST that were sold right away
  2. Whether a result of market panic over the volatile nature of the market currently or even a malicious attack on Terra’s system is still an unanswered question, but one of these two things likely occurred
  3. Regardless of the reason, that much being sold at once drove UST prices down which only cemented its de-pegging 
  4. As prices tumbled for UST, investors attempted to take advantage of the arbitrage by selling UST at a value of 90 cents to 1$ worth of Luna
  5. Due to the attempted arbitrage of UST being below its 1$ peg, the value of Luna decreased rapidly as a result of the on-chain swap mechanism. UST was being burned and LUNA got minted and then sold for USD and stablecoin, which ultimately put downward pressure on LUNA, which has now plummeted down to a fraction of a penny
  6. With both UST and Luna plummeting in price, and UST struggling to rise to its 1$ peg, the Luna Foundation Guard loaned and sold BTC in order to try and rebalance the pools and increase the UST price value. The market already being weak from the previous month, failed to have the intended benefit and one could argue that this large bitcoin sell-off by LFG might have also contributed to having those measures being even less effective

What This Unfortunate Series of Events Lead To:

The entire panic this caused between UST and Luna ultimately lead to Terra UST’s collapse. Debating whether the original 2 billion worth of UST being withdrawn, together with the large sell-off was done purposefully to cause the arbitrage is moot as the resulting effect caused both to plummet in value; and unfortunately, lead to the complete halt of the Terra Network validators and blocked production.

A close secondary effect of situations like this caused by either bad actors within the field, or just failed oversight, is the loss of trust in the DeFi ecosystem. From a financial perspective, the DeFi network is not to be equated with the lawless, unexplored frontiers of some new world, as institutions like Coinchange work daily to ensure that risk is mitigated. 

Why & How Coinchange Mitigates These Situations

So that is a summary of what happened to the Terra Network ecosystem, and why it collapsed in on itself. While the Terra protocol was one of the ones utilized by Coinchange, we are investors just as much as each one of our users. We understand the nature of the crypto market and realize that from malicious attacks or simple greed, these things can happen. We do not put all of our users’ eggs in one basket, however, which is one of the main reasons that despite what seems to be a huge loss for the market, all our users are still earning positive returns which is shown by the daily yield distributed.

We have spread out all investments on our platform across 14 different protocols that help us guarantee our users will continually earn yield in their Earn Account. With the faltering of Terra, we want to assure all of our users that this is but a tiny hiccup for your returns, and we are working tirelessly to introduce a new protocol that is safe and profitable for everyone. Keep your eyes open, and we’ll keep you up to date on how we’re going to continue helping you earn, and how we will replace Terra and get you earning even more.

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