The Collapse of TerraUSD: Highlighting the Risks of Algorithmic Stablecoins

A prominent cryptocurrency researcher in X recalled the infamous events surrounding the collapse of LUNA a few years ago, causing significant losses for many cryptocurrency users. Introducing his topic, the researcher described this incident as the collapse of LUNA shaking the cryptocurrency world. He considers it a classic case of algorithmic stablecoin-related risks.

According to researchers, LUNA suddenly dropped sharply from $115 to $0, wiping out $60 billion from its market value. An individual lost nearly $10 million, highlighting the level of inherent risk associated with cryptocurrency investment. Recalling the LUNA scandal, a researcher described Terra, the infrastructure behind LUNA, as a blockchain protocol and payment platform designed for algorithmic stablecoins. Terraform Labs, co-founded by Do Kwon and Daniel Shin, was launched in 2018 and is renowned for UST, the stablecoin of Terra, and related LUNA reserves. Terraform’s innovative approach has attracted many investors. The stablecoin solution does not rely on the traditional model of physical assets as collateral. Instead, UST maintains its value through complex algorithms and market mechanisms. Over time, Anchor Protocol, a DeFi solution built on the Terra Blockchain, has become the foundation of the Terra ecosystem, providing up to 20% annual returns for UST deposits. Anchor’s solution has become appealing and has attracted a significant portion of UST. The protocol accounts for 75% of the stablecoin’s supply but raises concerns about its long-term viability. The protocol recognized these concerns in May 2022 after a whale withdrew over 2 billion UST and sold it on the market. This triggered a stablecoin depreciation, with the price dropping to $0.91. The UST de-pegging has led to a major FUD in the Terra ecosystem, leading to a sell-off of LUNA and subsequent delisting of LUNA and UST from cryptocurrency exchanges. In light of these failures, the Terra blockchain has temporarily halted operations, causing the collapse of the ecosystem resulting in a $60 billion loss and significant legal implications for involved parties, including Voyager, Celsius, and Three Arrows Capital.

Other events following the collapse of TerraUSD related to the arrest and detention of Kwon in the context of extradition proceedings between South Korea and the United States. The researcher emphasizes that the consequences of UST are an important lesson for investors regarding the risks associated with algorithmic stablecoins and the allure of high returns. DYOR! #Write2Earn #Write&Earn $USTC {spot}(USTCUSDT)