Luna, UST & What Happened?
$60 Billion in value gone.
The loss of value associated with the crash of Luna, the main currency in the Terra blockchain ecosystem, is unprecedented in the crypto space both in terms of scale and speed. Over $40Bn of circulating supply and over $80Bn of fully diluted market value has evaporated. We studied historic examples of pegged crypto assets which seemingly indefinitely lost their peg, a notable example of this being Nubits, which was arguably the first algorithmic stablecoin.
Though, this had never happened before to an asset with as large a market cap as UST. As such, the impacts of this de-peg event were felt across the entire crypto ecosystem.
The UST/LUNA system was an extremely impressive example of reflexivity at play and was able to achieve scale that no single decentralized stablecoin was able to.
However, as is often the case in complex systems, the bigger something gets, the more unstable it becomes. One of the main selling points behind UST was its actual real-world use through Chai. A dedicated payment network that allows convertibility of Terra stablecoins to fiat at the point of sale, and such that in the event of a market crash speculators would rotate out of risky assets into UST and any outflow would be manageable.
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However, greed and yield chasing injected more than $10Bn of assets from speculators into the system. That capital was mercenary and would de-risk at the first sight of worsening conditions. As a result, rotating into the next hot thing with better yield.
In conclusion, there could be many hypothetical scenarios where this would be sustainable at a smaller scale. However, what is clear with the benefit of hindsight is that reaching such a scale in such a short time made the system fragile. Lastly, as the old adage goes – slow and steady wins the race.
Written by Nikita Fadeev
Nikita founded Fasanara Digital and ran it to become one of the largest market neutral quant crypto hedge funds in the world!
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Luna, UST & What Happened?
