4 Lessons To Be Learned (Opinion)


As the stormy waters recede due to this month’s crypto market bloodbath, one blockchain network has been washed ashore on dead ground: Terra.

Network co-founder Do Kwon has given up any attempt to restore the current chain to its former glory. he is now defending hard fork and start over with a different cryptocurrency – a highly questionable approach with no guarantees of value recovery for injured investors.

What is certain, however, is that neither TerraUSD (UST) nor the LUNA governance token will ever recover. The former now trade winds more than 90% below its expected parity in the dollar, while the latter has arguably suffered the most explosive and sudden change to collapse in the history of currency.

Financial implosions of this magnitude are virtually unheard of, even in crypto. How could the billions of dollars stored within such a widely supported protocol be completely evaporated in a week, especially from the so-called “stable currency”?

Now would be a good time for the entire crypto community to re-examine their assumptions about stablecoins, investments, and developers alike. Here are five valuable lessons we can draw from the corpse left behind by the Terra network.

From $100 to zero in days, MOON. Source: TradingView

1. Stable assets require stable reserves

Stablecoins are designed to bring the best of the financial world old and new: the decentralization and speed of cryptocurrencies and the stability of value of fiat currency.

However, the most successful stablecoins available at the moment do not use a completely “decentralized” model. The value of Tether (USDT) backs its stablecoin with stable, highly liquid, non-decentralized reserve assets (commercial paper, Treasury bills, etc.). These reserves must be regularly audited by private companies to ensure USDT is fully backed and convertible.

TerraUSD, however, was an algorithmic stablecoin. It followed an alternative model where the token was programmatically backed by cryptocurrencies, specifically LUNA, instead of dollars.

Any UST holder could redeem their stablecoin for a newly minted LUNA dollar at any time. Rather, LUNA holders could always burn their holdings in exchange for a UST count equal to the exact dollar value of LUNA burned. This mechanism created USDT-like stabilizing arbitrage incentives so that the stablecoin’s market price could always redirect back to a dollar.

However, unlike USDT, the asset “backed” UST was not as stable or liquid as real dollars. In other words, if many UST holders were to redeem their holdings at once, LUNA’s value could drop significantly after exchanges were flooded with oversupply.

This is, unfortunately, the exact scenario that took place this month after wealthy UST holders started a short attack against the stablecoin. Investors were incentivized to swap their UST holdings for LUNA en masse, thus creating an oversupply of the token. The result was a death spiral in which the value and credibility of both UST and LUNA crumbled.

It is likely that this phenomenon would have been avoided had UST been backed by an asset with a deeper market and less volatile value under pressure.

2. Buy value, not advertising

Just because something has a high market value doesn’t mean it’s a reliable investment. Don’t trust the “wisdom” of the bullish, greedy mob to tell you where your money should go. Do your own research.

This point cannot be emphasized enough. In hindsight, Terra collapsed due to a faulty stabilization mechanism left open for all to examine and scrutinize early on. In fact, previous coins similar stabilization models had already been tried, and failed, many years ago.

Such details did not matter much to most investors, nor did the unusually high 20% return offered to UST holders through the Anchor protocol. Given the opportunity to escape the flood before it hit, thousands of investors failed to use due diligence.

Even trusted billionaires throughout the crypto community jumped on Terra without a second thought, inspiring more to follow. Mike Novogratz, who had a LUNA-themed tattoo emblazoned on his arm in January, now calls the artwork “a constant reminder that venture investing requires humility.”

The events of this month prove that even experienced investors know little more than you about what is safe in cryptocurrencies. They should not be trusted.

As Bitcoiners say: Don’t trust; Verify.

3. Crypto is not all “decentralized”

The developers of Terra gave a lot of publicity to the creation of “decentralized money” for a “decentralized economy”. But when the time came, the community revealed its highly centralized and opaque governance structure underneath.

Between Do Kwon, Terraform Labs, and Luna Foundation Guard (LFG), the average user had virtually no power during Terra’s final moments. Numerous rash and monumental decisions were made by the aforementioned parties in an attempt to rescue the network, all of which failed anyway.

For example, on May 9, Do Kwon and just six other LFG members voted to deploy $1.5 billion from his reserve group to defend the value of UST. La Guardia then left the community with no updates until May 16, when explained that virtually all reserve assets, including 80,000 BTC, had been sold.

dokwon
Do Kwon, Founder of Terra

Additionally, on May 12, Terraform Labs collaborated with behind-the-scenes validators to freeze the Terra blockchain without notice. This was done without community consent, ironically with the stated aim of “preventing attacks on governance”. For context, the Terra chain only has 130 validators.

Even Do Kwon himself retweeted a mail asserting that the LFG was in fact a centralized system (which planned transition far in time).

When it comes to “decentralization”, there is a difference between “can’t” and “don’t want to”. If a small group can take control of a blockchain network whenever they see fit, is it really decentralized?

4. Stay humble, even if you are rich

For one thing, it’s in poor taste to kick a man while he’s down, especially when he’s already facing litigation and billionaire fines.

On the other hand, it can be quite entertaining to watch companies die, especially when they are run by people who were once so blatantly rude and self-assured.

Don’t take it from me. Take it from Do Kwon himself. Mere days before Terra’s collapse, he I speak with a popular streamer about the crypto industry, stating that it would be “entertaining” to see 95% of the industry’s startups die over time.

This was not a lighthearted joke, but a dangerous display of self-assurance and condescension towards Kwon’s competitors and critics. This became clear in the following days when Kwon publicly attacked several people who tried to warn him about security flaws in his protocol.

“You could listen to CT influencers about UST disassociating for the 69th time, or you could remember that everyone is poor now and go for a run instead,” he said. tweeted on May 7.

The next day, Kwon He suggested that those who fear a UST release would be “waiting until the age of men expires.”

However, the worst of Kwon’s performance was at the height of the cryptocurrency bull market in November. When a Twitter user described a process by which he predicted that Terra would go down due to a brief attack, the co-founder called it is “the most retarded thread” that I had read in this decade. He then called the user “stupid” and invited his “billionaire” followers to try the attack.

If Terra’s collapse was truly a black swan event, Kwon might have saved his reputation from its wreckage. But after repeatedly mocking their critics for being poor, openly inviting whales to short the net and lose $200 million”betabout LUNA’s disappearance… is it surprising that her followers are short of sympathy?

His actions have not affected him alone: ​​for better or worse, Kwon was Terra’s greatest leader. The implicit responsibility of leading the community out of a crisis has fallen on his shoulders.

But after destroying its own credibility, the crypto scene is largely reluctant to rally behind his last resort hard fork plan. some even distrust the legitimacy surrounding the current government vote for his proposal, believing that the vote was rigged.

Whether such claims have any merit is beside the point. Trust is fragile, especially in an industry already riddled with scams and mistakes. Winning it is an uphill battle, and losing it is as easy as a few stupid tweets.

Conclusion: learn now, not later

Crypto is home to a potential revolution in financial innovation. It also suffers from a huge lack of regulation, market manipulation, hacking, theft, anonymity, lack of transparency, and a reckless FOMO culture.

Investors who think they know what they are buying actually don’t know much more about crypto than you do. The developers who assured him that everything was under control could not, in reality, control the market around their stablecoin.

Take what you can learn from Terra’s failure and see if you can understand the inner workings of his other cryptocurrency investments a little better. No one is learning for you and, by the same token, no one will save you if those investments fall apart.

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