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There is still hope for LUNA.
When a prominent stablecoin and the token that backs it failed, the broader ecosystem certainly was dealt a blow, but ultimately it is surviving.There are these things in crypto called stablecoins. Stablecoins are supposed to be $1. Usually. Sometimes they are 1 euro or 1 won, but usually not. Blame U.S. dollar hegemony. Stablecoins exist so that crypto-natives can get in and out of the dollar easily without needing a bank to approve deposits and withdrawals. Stablecoins facilitate most crypto trading volume and power the never-ending crypto carousel that is “DeFi” (decentralized finance). More importantly, stablecoins are used by citizens subject to totalitarian governments spurring on hyperinflation.
There are a few flavors of stablecoins out there, notably tether (USDT), USD coin (USDC), binance USD (BUSD) and dai (DAI). Also quite notably, we had terraUSD (UST). These are the five largest stablecoins and they represent roughly $160 billion of value. Three of these stablecoins (USDT, USDC, BUSD) are collateralized stablecoins issued by centralized entities. These entities own a treasury of dollars that back each coin so that each coin can be redeemed for $1 by the holder from the issuer. Our friends at crypto data provider Kaiko did a great job breaking down what exactly happened. The short of it is this: UST dipped below $1, and all attempts, both by the Terra protocol algorithm and by the lending out of LFG reserves to trading firms, couldn’t bring UST back to $1. Between UST and LUNA, over $40 billion of value was lost.
What exactly happened doesn’t really matter. What really matters is that when something bad happened, Terra couldn’t handle it. What really matters is that an undercollateralized, algorithmic stablecoin will fail no matter how long it succeeds.
The system failed. But if we’re honest, UST was a wild success up until the moment it wasn’t. History should serve as a lesson here, when we inevitably will see a successful UST copycat crop up in 2027 or whatever.
We also are incredibly lucky that UST and LUNA aren’t big or intertwined enough to cause mass hysteria across all markets. I honestly believe we were lucky this happened in 2022 and not in 2030. I think we are numb to these large numbers given the unprecedented bull market of the last 13 years, and so this bears repeating. Bitcoin was a worthless, purely peer-to-peer version of electronic cash created by an unknown person in 2009. No big company or government put marketing, research or legal dollars behind it, and yet it is now a serious macro asset that important politicians and financiers feel the need to comment on.