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| Image captured from CoinMarketCap Cryptocurrency Exchange / Courtesy of CoinMarketCap |
Market insiders view crypto ecosystem likely to survive despite stablecoin's plunge
By Anna J. Park
The death spiral of Terra (UST) and Luna last week sent shockwaves through the entire cryptocurrency market, triggering sell-offs of other major coins as well. The UST-Luna ecosystem's collapse is being compared to the cryptocurrency industry's version of the fall of the Lehman Brothers, while some have even said it is a prelude to the end of the coin bubble era.
However, market insiders and watchers say that such a drastic view is a stretch, saying the global cryptocurrency sector has evolved into a phase where substantial value is created, and it's not likely for the entire industry to crash. Yet, they generally agree that other stablecoin projects like tether and USDC will be hit by the event.
What is Terra-Luna universe?
Up until the end of last month, Terra (UST) was one of the world's most stable cryptocurrencies, pegged at a fixed value of $1. The coin's market cap once reached the sixth-largest among all coin assets, as it gets its stability from large reserves which had been made possible with the system's floating token Luna. In theory, the so-called "smart-contract" algorithm, or automatic trading of Luna, keeps the UST's price stable. With the rise of Luna's price, the UST system could secure enough reserves for dollar-pegging.
The coin system's co-founder and CEO Kwon Do-hyung, known on Twitter as Do Kwon, boasted that the stablecoin brought innovation to the cryptocurrency scene by bridging the fiat-to-digital currency divide. The Stanford-educated former software engineer at Microsoft and Apple generated the complex crypto ecosystem of UST and Luna, where UST yielded almost 20 percent interests for investors who just stake the coin.
Because of the strong interest generated from staking the coin, the UST- Luna ecosystem had been one of the best-performing coins earlier this year, particularly amid the bearish market mood.
Depeg attack initiated last week
Yet, a short attack triggered on May 9 triggered the fall of the stablecoin system. As the UST's price failed to maintain its peg at the one dollar value earlier last week, Luna's price also fell to less than a penny, nearing zero, as investors liquidated their money.
The death spiral accelerated as the supply of Luna was increased by more than 20 times in the past few days as UST was losing its peg to the dollar. As a result, it was a complete nose-dive plunge to nearly zero from its previous price of $119 at the end of last month. In just a few days, the coin lost over 99.9 percent of its value.
Amid the crash, the Terra blockchain has officially been halted as of around 11 a.m. Friday Korea time.
"The Terra blockchain has officially halted at block 7607789. Terra Validators have halted the network to come up with a plan to reconstitute it," an official Twitter account called Terra (UST) Powered by LUNA announced on Friday, Korea time.
According to coin industry media outlets, their rebuilding plan is to mint new Luna coins and distribute them to holders of Luna and UST. About 40 percent of the new coins will be distributed to Luna stakeholders at the time of the UST depeg attack initiated on May 9, and 40 percent to UST holders at the time of the new network launch. About 10 percent of it is to be distributed to marginal Luna holders between the attack and the halt.
New Luna to succeed?
It remains to be seen whether the halted system could survive its current predicament, overcoming the market participants' distrust and financial regulators' heightened investigation.
"Since last year, there have been opposing market views on Terra's ecosystem, as doubts have been especially raised about whether the 20 percent interest rate for stakeholders of UST would be sustainable for the long term," said Han Dae-hoon, a cryptocurrency analyst at SK Securities.
"What is an expected scenario for the future would be that, firstly, algorithm-based stablecoins will now find it hard to position themselves properly in the crypto market. With the UST's plunge, U.S. Treasury Secretary Janet Yellen mentioned that regulations on stablecoins would be necessary, which would strengthen financial authorities' targeted inspections of algorithm-based stablecoins. Secondly, other stablecoins cannot help but witness a shrinking of the market for a while. As there have also been controversies whether tether (USDT) or USDC have secured enough deposits, their financial soundness would be another point of issue," the analyst explained, adding that a short-term contraction will be unavoidable for the cryptocurrency market.
