Terra UST

Terra is a blockchain network that had its own algorithmic stablecoin named UST. UST had an interesting relationship with Terra’s native token, LUNA. At any moment in time, anyone could swap $1 worth of Luna for 1 UST. By doing this, the protocol created incentives where users could profit, in theory risk free, through arbitrage. For example, if UST = $1.1, users were incentivized to swap $1 worth of LUNA to receive 1 UST and pocket 10 cents of profit. If UST = $0.9, users were incentivized to swap 1 UST for $1 worth of LUNA and again pocket 10 cents of profit.

However, UST, started de-pegging on May 11, 2022 (for an excellent review look at: https://www.nansen.ai/research/on-chain-forensics-demystifying-terrausd-de-peg). This caused people to panic and lose faith on its ability to maintain its peg, which in turn led to a bank run (i.e., people lining up to sell their UST for other stablecoins and get out). This further de-pegged UST and led to a downward spiral in price. In a matter of a few days UST was worth just a few cents. Although UST still exists, its aforementioned reciprocal relationship with LUNA no longer exists. LUNA too collapsed and depreciated from about $120 to thousands of a cent. It is now called LUNA Classic (LUNC). At the end of the day, an estimated $60 billion was wiped out, truly shocking.

One of the primary factors that contributed to the crash was a large and unsustainable influx of UST into the market. This was mainly because there were protocols on Terra, like Anchor and Mirror, where individuals were able to earn significant yield. Namely, Anchor Protocol offered about a 20% yearly return on UST, which encouraged many people to hold UST and deposit it on the protocol. In turn, the market cap of UST mushroomed to billions of dollars. This caused an oversupply of UST in the market.

The UST crash Is a stark reminder of the risks associated with cryptocurrency investment. Cryptocurrencies are highly volatile and their prices can fluctuate rapidly based on a variety of factors. Even stablecoins as the story of UST demonstrates. It’s essential to understand the risks involved in investing in cryptocurrency and to do your due diligence before making any investment decisions.

The crash also highlights the need for transparency and communication from cryptocurrency projects’ founders and teams. Clear and timely communication can help to prevent panic selling and reassure investors during market turbulence. This is something the founder of Terra, Do Kwon, failed to do. Indeed, the silence was deafening.

While cryptocurrency offers exciting opportunities for investors, it’s essential to approach it with caution and to do your research before investing. As always, the key to successful investing is to stay informed and stay vigilant.