A celebrated experiment that combined maths and software to get a digital currency to behave like a dollar is crashing in dramatic fashion, posing the biggest test yet to decentralised finance and the will of its backers to defend it.
TerraUSD, or UST, is an algorithmic stablecoin, meaning it uses a complex combination of code, trader incentives, smart contracts and no small amount of faith to maintain its peg of one-to-one to the US dollar. It does this by working with a crypto token in the same ecosystem, Luna, which can be swapped for UST and vice versa by traders to keep the price of UST where it should be.
The point of projects like UST is to enable crypto traders to make transactions easily and quickly without needing to leave the digital asset ecosystem, rely on intermediaries or worry about the value of their coins going up and down. By using software programs to manage the token’s volatility, the opportunities for profiting off arbitrage are even greater — DeFi lender Anchor Protocol was known for offering market-beating rates of up to 20 per cent to traders willing to deposit UST on its platform. In summary, it’s the crypto dream.
A month ago, the future looked bright for Terra and its main backer Do Kwon: A consortium called the Luna Foundation Guard aimed at providing collateral for Luna — then at an all-time high value of $US119 — had bought more than $US1.5 billion in Bitcoin to shore up UST’s peg, with its members reading like a Who’s Who of crypto. But on Monday, all of the mechanisms that were supposed to keep UST stable weren’t. It fell to a low of 60 cents on that day, and reached a further low of around 20 cents in another crash on Wednesday, taking its market value down from $US18.4 billion to $US5 billion. Luna also fell considerably, dropping to as low as $US2.35.
After halting its blockchain, terraform Labs announced on Friday morning AEST that it was restarting it.
“Many people were caught off guard,” said Nikita Fadeev, partner and head of crypto fund Fasanara Digital, which de-risked its position in advance of the crash. “Everything broke there. It is full capitulation.”
Exactly why all of Terra’s carefully-planned mechanisms failed to do their job remains unclear, and conspiracy theories abound about shadowy actors with untold wealth to play with. But one thing’s for certain: Kwon isn’t going down without a fight.
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