For several days now, the mainstream media has been living with the problems of Project Terra and its flagship cryptocurrency Luna – The experiment, which gained great popularity in a relatively short time (the project was launched in 2019), has attracted billions of dollars from individuals and companies. It just took an amazing fall, catalyst Crypto market crash.
It is not known what caused the breakdown of the problems. At this point, you can only guess. The Internet is full of speculation: there is talk of classic fraud, errors in programming code, investor collusion against Terry’s developers, course manipulation, etc. People from the cryptocurrency world were frightened, as a wide range of people, including people from Poland, had been aggressively promoting the Asian startup’s offering in recent months.
Follow the thread on the ball. Where did Tera come from?
What is Project Terra? This is the work of the South Korean company Laboratoria Terraform, which was founded at the beginning of 2018. A year later, in April, it published a white paper (equivalent to a prospectus for a company that debuted on the stock exchange, addressed to potential investors), which describes An idea to create an alternative e-commerce financial system, based on blockchain technology and the so-called stablei.e. cryptocurrencies that reflect the value of fiat currencies – including. US dollar, Mongolian Tugrik and South Korean won.
The idea was to take into account the large fluctuations in exchange rates typical of the crypto market (Within a day, the valuation of a coin (a particular cryptocurrency) can change by up to tens of percent). It was the cornerstone of building a giant company that could rival companies like PayPal in the future.
For an idea to spread, it must be in keeping with the zeitgeist. Blockchain Terry is designed to be more environmentally friendly than the Bitcoin network, which is subject to massive energy consumption. The environmental issue is especially important now that the world is moving towards zero emission, which is fashionable. As it turns out, the best is the enemy of the good.
Terry’s database security and operations authorization are unanimously supervised by 130 network participants – these are the people who decided to block as many tokens as possible (for example, tokens are used to stabilize the cryptocurrency exchange rate). So the system is vulnerable to tampering – this is one of the hypothetical causes of startup problems.
Many cryptocurrency startups issue their own currency – at an early stage in the company’s development, this allows them to easily raise capital from investors. In the case of the Terra, the coin was specifically a luna. Aside from the fact that it has been introduced to trade on several exchanges (it has been pulled from many markets in the face of current events), it plays a very important role in the Terry ecosystem – it is an entry ticket to it and is used to fix the value of stablecoins (more can be found about it in the next paragraph) which was drafted by a South Korean startup.
In practice, it looks like this: first, you need to buy a luna, and then exchange it for one of the stablecoins – for example, denominated in US dollars, i.e. Tirausd (UST for short). If someone wants to get the cash back, they must first exchange the terra for luna, then sell the luna in the market or make a UST/USD trade. It sounds very complicated, but in practice it is not. Usually, the solutions are sewn into an easy-to-use application, which attracts many ordinary people to cryptocurrency.
What was the original Terra innovation about? South Korean experimenters did not rigidly associate the terrain with the US dollar, as happened with other stablecoins (including the USDC), which have a single coverage in a classical asset – for example, gold or fiat currency. They chose a different method – arbitration, for which they use lunas.
How it works? When the floor tanks price deviates from a predetermined value (reflecting the one-to-one US dollar exchange rate), Arbitrators make a stability transaction, for example when Terry’s price falls, they exchange it for Luna, at the same time burning said tokens, causing the supply to decrease. If the price of the terra rises too much, then it is reversed – then Luna is replaced and burned.
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See also: Is it worth investing in cryptocurrency? Lots of caveats
Failed banking game
Within a few years, Asians built an elephant on clay legs. Like? Terra is now a spectacle of protocols that mirror classic financial instruments. One of them is Anchor – it concerns loans and deposits with high interest (up to 20%).
Over the past few months, he has been It has attracted individual and institutional investors to the network like a magnet. They thought they had found a haven for savings being devoured by high inflationThey count on easy income. Influencers from all over the world (including Poland) played a major role here. They provided an anchor for street folks as a safe way to get high passive income. Despite the fact that the show looks like a delay bomb at first glance, it still attracts crowds of customers. why?
Their vigilance has been dulled by the narrative that they are investing in a stable virtual currency, not a cryptocurrency that changes its value — says Wojciech Sroka, president of Norion, a platform for coding business ideas.
If you are afraid, it will be money
As long as the capital flowed into Tira, things looked better than good. The market value of the cryptocurrency has grown, attracting the attention of the so-called Street. In February of this year, Terry’s creators provided Anchor with an additional $450 million in capital, explaining this by securing a dividend on the investments. The point is that there was a shortage of people willing to borrow, which meant that the deposited capital did not earn, so the attractive rate of return was put into a big question mark. It was another symptom of trouble. Some only saw it and pulled out their capital in time. There were other reports of an apparent capital injection.
Society has long speculated that the Anchor business model would fail sooner or later. Crowds and CEO Terry overshadowed the negative news with a positive message, which is why the skepticism didn’t reach a wider audience early enough. Vojtek Sroka points out.
He adds that experience is a good rule You should stick to it for all financial endeavors, it’s “if it looks too good, it looks too bad”.
Negative sentiment finally reached Terra’s vast customer base, causing panic. A crowd of panicked people ran from the floor to cash, which can be compared to a classic bank attack. The mechanism that stabilizes the price of the cryptocurrency has failed. Luna lost 99 percent. Value. The market has shrunk from tens of billions to tens of millions of dollars. In order for the terrestrial treasury to US dollar ratio to be one-to-one again, it would be necessary to get rid of (experience: burn) stablecoins from the $17 billion tera system. Terry’s founders say they are making plans for recovery.
The end of the free American woman?
These events shook the market so much that it caught the attention of regulators in Washington. Treasury Secretary Janet Yellen on May 12 called lawmakers on the US House of Representatives committee, which He oversees the financial services industry to regulate stablecoins, and announced that the US Treasury is already working on a report on the matter.
Stefan Berger, Member of the European Parliament and Member of the Economic and Monetary Committee, who led Parliament’s work on the regulation of crypto-asset markets (regulation applied in the crypto-asset market, for short) MiCA, the first legal act to regulate the European cryptocurrency market). He wrote on Twitter that stablecoins are failing and should be regulated.
There is no doubt about the necessity of regulation, Marcin Daneke, president of the Institute for Research and Education in Financial Planning. At the end of last year, he wrote in a Linkedin article that stablecoins are the Achilles heel of the cryptocurrency market. How does he comment on current events?
The role of stablecoins is the same as in high-rise apartment buildings or large structures. breadth. It is supposed to make the entire structure flexible and prevent it from collapsing. The system is as strong as its weakest linkWhich – in my opinion – in the case of cryptocurrencies is a stable and complex currency market – says the expert in an interview with money.pl.
In addition, he notes that creators, illustrators and crypto enthusiasts constantly argue that this market does not threaten the stability of the financial system at all, since it is separated from it by a system of stablecoins. Meanwhile, in the past few days – claims Marcin Daneke – this is colorBecause of the steep drop in the rate in five days from more than $72. up to tens of cents, losing one-to-one dollar peg, The stablecoin market is indirectly shaking up the entire cryptocurrency market.
the top of the mountain
Will the problem spread to the bones? Vojtek Soroka does not think so. He notes that many companies have built their business models based on the Anchor protocol. In his opinion, they are likely to find a way out of the impasse by trying to move from Terry to another blockchain network, which should not be a simple task. Additionally, Magpie believes that it will be difficult to rebuild trust in the crypto market in a short time.
People who invest in the high-risk cryptocurrency market, the head of Norion reminds them of the principle of diversification and investing the amount that they can write off without any problems in case of failure.
Carolina Wisota, financial journalist
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