The Collapse of TerraUSD
TerraUSD's value recently collapsed, and the broader crypto market followed suit, wiping out individual and institutional investors. Especially hard hit were crypto investors that took positions last year, desirous to capture the long-term profitability associated with Bitcoin and a few other cryptocurrencies, despite the risky price volatility of the assets.
The recent crash of TerraUSD is correlated to the general downturn of the crypto market. For example, on May 11th, after decoupling from the dollar, the price of TerraUSD continued to fall from $0.82 to $0.33 in just a matter of hours, and other cryptocurrencies also experienced price devaluation.
Previously, many investors felt TerraUSD was the darling of altcoins. Given the unique supply design, an experienced development team, and strong community backing, the crash of TerraUSD took many by surprise. But something snapped just a few weeks ago, and now the market is in retreat.
The crash of TerraUSD has been one of the more significant setbacks to hit the world of cryptocurrencies. TerraUSD is a unique stable coin or altcoin. It is pegged to the dollar but not backed by fiat. But unfortunately, the currency's price stability has failed to live up to expectations.
TerraUSD is an algorithmic stable coin, traditionally a risky investment, but a coin that held promise amongst the crypto community. However, a few weeks ago, the currency pegged to the U.S. dollar quickly fell from $1 per token to $0.33, and investor panic initiated a significant selloff.
The selloff of TerraUSD appears to have bled over to the entire crypto market, and most cryptocurrencies experienced substantial losses in value.
So, what went wrong with TerraUSD, and why did it crash?
First, it is essential to understand the asset. For example, TerraUSD is an algorithm stable coin and not a traditional stable coin cryptocurrency backed by fiat or a reserve of near-liquid cash equivalents. So possibly investors lost confidence in the coin sans a reserve.
Terra Protocol is a blockchain that issues algorithmic Terra stable coins in the Terra ecosystem. TerraUSD is just one of 18 Terra stable coins. However, TerraUSD was the most widely utilized coin within the ecosystem.
TerraUSD was, in theory and practice, able to maintain its peg value due to arbitrage and its' tether to Luna, a part of the Terra ecosystem. Furthermore, Luna was available to absorb the short-term volatility of Terra due to an exchange arrangement. The arrangement permitted anyone to swap the coins back and forth at an exchange ratio designed to achieve equilibrium between the cryptocurrencies and the USD. The balance was achieved by either minting and burning from the Luna side, creating price elasticity, and solving for a one-to-one exchange value.
No one has yet identified the root cause of the crash or sudden downturn, but a few theories exist. Some speculate that the algorithm permitted trade volume above an unsustainable mining or burning rate, causing the coin to crash and circumvent the protection of the Luna arrangement. On the other hand, the catalyst stressing the protection mechanism was suspected to be a sizeable whale withdrawal exceeding typical norms.
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The Aftermath
The crash of TerraUSD may be a watershed moment for the cryptocurrency community. For years, enthusiasts had been buying up and storing cryptocurrency in their wallets—and now, suddenly, the value of holdings in their accounts or wallets has dramatically been reduced by the crypto market downturn.
The question on everyone's mind was, "How could such an advanced and well-thought-out altcoin ecosystem go so wrong?" Some believe that TerraUSD gained traction and support exponentially, outpacing support mechanisms and the market. The result is that some catalysts placed too much pressure on the network, resulting in unhandled transactions, panic selling, and the ultimate crash of TerraUSD.
Now, news out of South Korea reveals that Terraform Labs Korea Corporation put up two offices for a sales bid just days before the crash. As a result, legal teams in South Korea are in full investigation mode, taking a hard look at the transaction and collapse associated with the Luna token and TerraUSD stable coin.
The crash of TerraUSD, continuing news of exchange breaches, the general stock market turndown, and the call for more regulated crypto markets appear to have temporarily slowed enthusiasm in the crypto sector.
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