Terra Hasn’t Killed Crypto, But It Was a Narrow Escape

Stable coins were about to hitprime time. They are having a crisis.

Speculation that the collapse of one of the biggest experiments in finance could lead to the death of the coin seems to have been overblown. If Terra's implosion had happened after a few more months of growth, high-profile stable coins may end up being the main casualty.

Terraform Labs lost its digital coin counterpart Luna in a tumble starting on May 9. The price of Luna is near zero, while UST is around 20 cents, a month after hitting a record $119.

The collapse of the sector knocked $300 billion or so off of the total market value. It caused wobbles in the largest stable coins, which back their peg with dollar and dollar-equivalent assets, but they were back to normal by the end of the week.

Stable coins are used by traders to retain value without leaving the digital asset community. TerraUSD may be entering retirement, at least for use by projects that get too big to fail, as investors look to them as a safe haven during periods of volatility.

Hilary Allen is a professor of law at American University. A lack of trust in stable coins would be catastrophic.

TerraUSD had a total market value of $18.6 billion before it lost its peg on May 8, dwarfing the market value of its rivals, according to data from CoinMarketCap. It might have been a different story had it not been for that.

Price of Failure

The co- founder of Terra said he wanted to build a reserve that could help shore up UST in times of stress. The Luna Foundation Guard was established to look after a pile of Bitcoins he was accumulating to act as a security for UST. Developers continued to build apps on the project, investors bet on its future, and some people irrevocably tied themselves to the project.

The Most-Watched Whale is the King of the Lunatics.

$UST with $10B+ in $BTC reserves will open a new monetary era of the Bitcoin standard.

P2P electronic cash that is easier to spend and more attractive to hold #btc

According to Elliptic, the LFG bought $3.5 billion of the virtual currency between January and March. It was thought that if TerraUSD unwound, the firm could use its existing Bitcoin supply to try and stop the selloff.

There is a mystery surrounding the transfer of Bitcoins.

If the LFG had reached that $10 billion figure, the de-peg would not have been so brutal to markets. In calmer times, such as the few days before Terra broke its peg, the average daily trading volume of the digital currency was $30 billion.

The reason why I want to get to $10 billion is that we will be the largest single holder of Bitcoins in the world. Following Terra's collapse, a video of the interview was removed.

The failure of UST is equivalent to the failure of the industry as a whole.

(Un)Stable

Even with some reserves added in as a backstop, the model that governs UST is dependent on a combination of software programs, trader incentives and swaps with Luna to maintain its value. The quality of the assets has been called into question before, but the instability caused by Terra helped the token to avoid the same fate.

Terra Goes From Defi to Death Spiral.

Sam Bankman-Fried, chief executive of FTX, said on Thursday that they shouldn't use the same word for all of them. They need upside if they want to justify the risk.

The design flaw: minting coins (printing money) does not create value, it just dilutes the existing coin holders. Incentives doesn’t create value. It is just a bootstrap mechanism.

Build products people use.

— CZ Binance (@cz_binance) May 13, 2022

Increased scrutiny of the entire stable coin sector by regulators is one of the consequences of Terra's downfall. The Treasury Secretary said on Thursday that the incident shows the dangers of private stable coins, which are unregulated and can present the same kind of risks as bank runs.

The chief executive of the Stellar Development Foundation said that a stable coin should be able to live up to its name.

Terra's collapse was part of the natural order of the market, according to the co-founder and former CEO of Tether.

The bull market is great because it attracts the crazies, it attracts all the money, and it attracts the smart people into the market. Without the bear market, we wouldn't clean out the crowd.

With assistance from Olga Kharif.