September 27, 2022

Forbes called the collapse of UST and LUNA the “fifth reboot” of the crypto market


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The collapse of the Terra ecosystem can be compared to the bankruptcy of Mt.Gox, the attack on The DAO, the explosion of the ICO bubble, and the collapse of the crypto market in March 2020. Algorithmic stablecoins may disappear as a category, writes Forbes.

According to journalists, a combination of greed and the immaturity of technology led to the perfect storm.

The incident was another reminder of how get-rich-quick schemes can overshadow common sense, which is still characteristic of the “young” cryptocurrency market, the publication claims. This is another reason to rethink whether innovation is a disguise for excessive leverage.

Journalists compared the collapse of UST-LUNA with the 2008 mortgage crisis in the US. At its epicenter were low-quality mortgages that were packaged and sold as new securities with high credit ratings. Similarly, TerraUSD was considered reliable until its crash.

A representative of one of the investors in the Terra ecosystem – Lightspeed – said that the venture capital firm saw the algorithmic stablecoin as a shift in the computing paradigm, and not as a minor offshoot from bitcoin.

The head of another iconic investor in the project, Three Arrows Capital, Su Zhu sees the collapse as an implementation problem rather than a flawed value proposition. The entrepreneur kept the #LUNA hashtag on his Twitter profile.

The collapse of UST-LUNA has hurt the desire to keep the spirit of decentralization under the dominance of the centralized stablecoins USDC, BUSD and USDT.

Their issuers were criticized in the community for the lack of transparency of the collateral. This was especially evident with Tether, which invested up to 50% of its reserves in commercial paper of unknown companies.

As a result of the incident, there was a short-term loss of USDT parity with the US dollar due to the flow of funds into USDC. But by the end of the week, it turned out that some investors left the last asset for fiat.

According to Circle’s chief strategy officer Dante Disparte, UST was run by a “wilful and arbitrary” centralized organization under a decentralized banner. Earlier, the head of Terraform Labs, Do Kwon, promised to “crack down” on the DAI competitor launched back in 2014.

Yusko and Ark Invest analyst Yasin Elmanjra are convinced that, unlike previous “reboots”, the UST incident will not lead to a revision of the position regarding the prospects for algorithmic stablecoins. Their best fiat-backed version is already out there.

Confirmation or refutation of this assessment will depend on the reaction of the market to this sudden shock, according to Forbes. The good news is that most investors are reticent. According to JPMorgan strategist Nikolaos Panigirtzoglou, they have been reducing risk since October 2021.

An additional positive factor is the feeling that the problems of UST-LUNA will not lead to “infection” of the traditional financial market. Treasury Secretary Janet Yellen agreed with this. Confirmation is the stability of Tether after a short-term decline in the USDT rate to $0.95.

Journalists emphasized that the collapse of UST-LUNA could be an impetus for more responsible forms of innovation in the crypto industry, using the stablecoin from Custodia as an example.

Another form of such a rethinking they called the launch of Aave and Compound DeFi protocols by teams aimed at institutionalized lending pools. The latter was even recently awarded a “B” rating from Standard & Poor’s, which can be seen as a “step in the right direction,” Forbes emphasized.

Recall that the institutional-oriented landing protocol Clearpool launched the first private liquidity pool. Jane Street Capital and BlockTower Capital became its participants.

Earlier, analysts at Goldman Sachs noted that algorithmic stablecoins can only succeed if they are widely used in payment transactions.

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