Infusion of $3.5bn not enough to revive Terra's 'stablecoin'
(2022/05/17)
- Reference: 1652749581
- News link: https://www.theregister.co.uk/2022/05/17/terrausd_luna_crash/
- Source link:
TerraUSD, a so-called "stablecoin," has seen its value drop from $1 apiece a week ago to about $0.09 on Monday, demonstrating not all that much stability.
The cryptocurrency token, abbreviated UST, is supposed to be pegged to the price of the US dollar. Hence the "stable" terminology.
But UST is not a "centralized stablecoin" that's exchangeable for a fiat currency; UST for USD (US dollars). Rather, it's a "decentralized stablecoin," meaning it can be exchanged for Luna (LUNA) tokens, another cryptocurrency tied to the Terra blockchain.
[1]
UST and Luna are linked by an algorithm in a "smart contract" that's supposed to keep the value of the UST pegged to 1 USD without fiat currency reserves. The algorithm burns or deletes Luna tokens to create new UST tokens and vice versa in an effort to balance supply and demand.
[2]
[3]
"The Terra protocol uses the basic market forces of supply and demand to maintain the price of Terra," the [4]Terra documentation explained.
"When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price."
[5]
This creates arbitrage opportunities – the ability to profit from price differentials – because Terra's protocol is set up so that users can always trade 1 USD worth of Luna for 1 UST. And if you're involved in the unregulated world of decentralized finance, that's the point of trusting your money to someone's programming code – profit.
Weak link in the chain
The complicating factor here appears to have been [6]Anchor , one of the three main protocols in the Terra ecosystem. Anchor's creators [7]describe it [PDF] as the "gold standard for passive income on the blockchain." It's a savings protocol that at one point paid participants close to 20 percent interest on their investment.
Unsurprisingly, that exorbitant interest rate appealed to people and drove demand for UST to deposit in Anchor. As of about three weeks ago, about 12.67bn UST had been deposited in Anchor, according to [8]Decrypt , which at the time accounted for about 72 percent of all UST.
On Saturday, May 7, about $2bn in UST was unstaked – made available for trading – from the Anchor protocol and hundreds of millions of UST were sold. This has been described [9]as an attempt to manipulate DeFi token prices for profit, though it might simply reflect recent market volatility or an exodus from Anchor as an oversupply of lenders drove the interest rate down.
Whatever the rationale, the price of UST declined, so investors tried to trade for Luna but the algorithmic system is constrained in the amount of UST or Luna that can be burned or minted, and the Terra blockchain also can only handle so much activity. Eventually, the system was overwhelmed by panic selling and the prices of [10]both tokens plummeted.
[11]Coinbase CEO says everything's OK after SEC filing gives netizens the jitters
[12]US brings first-of-its-kind criminal charges of Bitcoin-based sanctions-busting
[13]Cryptocurrency laundromat Blender shredded by US Treasury in sanctions first
[14]Shopping for malware: $260 gets you a password stealer. $90 for a crypto-miner...
Last week, the Luna Foundation Guard (LFG), a fund established by Terra creator Do Kwon, [15]bought $3.5bn in Bitcoin to prop up its Terra tokens. But that fund is now largely depleted and the UST has not recovered – it's exchangeable for [16]about $0.09 – and Luna tokens are worth even less, [17]about $0.000193 from about $120 in April. All told, the coin collapse has erased [18]about $42bn from the Terra ecosystem.
On Monday, in [19]a series of tweets , the LFG said only 313 of its roughly 80,000 Bitcoins remain, the majority of which appear to have [20]gone to large investors.
[21]
Small investors can look forward to being reimbursed with this remainder, or so the LFG suggests.
"The foundation is looking to use its remaining assets to compensate remaining users of $UST, smallest holders first," the tweet series [22]concluded . "We are still debating through various distribution methods, updates to follow soon." ®
Get our [23]Tech Resources
[1] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[4] https://docs.terra.money/docs/learn/protocol.html
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[6] https://www.anchorprotocol.com/
[7] https://www.anchorprotocol.com/docs/anchor-v1.1.pdf
[8] https://decrypt.co/98482/we-need-to-talk-about-terras-anchor
[9] https://twitter.com/OnChainWizard/status/1524123935570382851
[10] https://decrypt.co/100402/how-terra-ust-luna-imploded-crypto-crash
[11] https://www.theregister.com/2022/05/13/coinbase_ceo_assets/
[12] https://www.theregister.com/2022/05/16/judge_cryptocurrency_sanctions/
[13] https://www.theregister.com/2022/05/06/us_treasury_sanctions_blender/
[14] https://www.theregister.com/2022/05/14/eternity-project-malware-sale/
[15] https://www.cnbc.com/2022/05/09/what-is-terrausd-ust-and-how-does-it-affect-bitcoin.html
[16] https://www.coinbase.com/price/terrausd
[17] https://www.coinbase.com/price/terra-luna
[18] https://www.elliptic.co/blog/what-happened-to-the-3.5-billion-terra-reserve-elliptic-follows-the-bitcoins
[19] https://twitter.com/LFG_org/status/1526126703046582272
[20] https://twitter.com/ncweaver/status/1526192900547092484?s=20
[21] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[22] https://twitter.com/LFG_org/status/1526126719874109440?s=20
[23] https://whitepapers.theregister.com/
The cryptocurrency token, abbreviated UST, is supposed to be pegged to the price of the US dollar. Hence the "stable" terminology.
But UST is not a "centralized stablecoin" that's exchangeable for a fiat currency; UST for USD (US dollars). Rather, it's a "decentralized stablecoin," meaning it can be exchanged for Luna (LUNA) tokens, another cryptocurrency tied to the Terra blockchain.
[1]
UST and Luna are linked by an algorithm in a "smart contract" that's supposed to keep the value of the UST pegged to 1 USD without fiat currency reserves. The algorithm burns or deletes Luna tokens to create new UST tokens and vice versa in an effort to balance supply and demand.
[2]
[3]
"The Terra protocol uses the basic market forces of supply and demand to maintain the price of Terra," the [4]Terra documentation explained.
"When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price."
[5]
This creates arbitrage opportunities – the ability to profit from price differentials – because Terra's protocol is set up so that users can always trade 1 USD worth of Luna for 1 UST. And if you're involved in the unregulated world of decentralized finance, that's the point of trusting your money to someone's programming code – profit.
Weak link in the chain
The complicating factor here appears to have been [6]Anchor , one of the three main protocols in the Terra ecosystem. Anchor's creators [7]describe it [PDF] as the "gold standard for passive income on the blockchain." It's a savings protocol that at one point paid participants close to 20 percent interest on their investment.
Unsurprisingly, that exorbitant interest rate appealed to people and drove demand for UST to deposit in Anchor. As of about three weeks ago, about 12.67bn UST had been deposited in Anchor, according to [8]Decrypt , which at the time accounted for about 72 percent of all UST.
On Saturday, May 7, about $2bn in UST was unstaked – made available for trading – from the Anchor protocol and hundreds of millions of UST were sold. This has been described [9]as an attempt to manipulate DeFi token prices for profit, though it might simply reflect recent market volatility or an exodus from Anchor as an oversupply of lenders drove the interest rate down.
Whatever the rationale, the price of UST declined, so investors tried to trade for Luna but the algorithmic system is constrained in the amount of UST or Luna that can be burned or minted, and the Terra blockchain also can only handle so much activity. Eventually, the system was overwhelmed by panic selling and the prices of [10]both tokens plummeted.
[11]Coinbase CEO says everything's OK after SEC filing gives netizens the jitters
[12]US brings first-of-its-kind criminal charges of Bitcoin-based sanctions-busting
[13]Cryptocurrency laundromat Blender shredded by US Treasury in sanctions first
[14]Shopping for malware: $260 gets you a password stealer. $90 for a crypto-miner...
Last week, the Luna Foundation Guard (LFG), a fund established by Terra creator Do Kwon, [15]bought $3.5bn in Bitcoin to prop up its Terra tokens. But that fund is now largely depleted and the UST has not recovered – it's exchangeable for [16]about $0.09 – and Luna tokens are worth even less, [17]about $0.000193 from about $120 in April. All told, the coin collapse has erased [18]about $42bn from the Terra ecosystem.
On Monday, in [19]a series of tweets , the LFG said only 313 of its roughly 80,000 Bitcoins remain, the majority of which appear to have [20]gone to large investors.
[21]
Small investors can look forward to being reimbursed with this remainder, or so the LFG suggests.
"The foundation is looking to use its remaining assets to compensate remaining users of $UST, smallest holders first," the tweet series [22]concluded . "We are still debating through various distribution methods, updates to follow soon." ®
Get our [23]Tech Resources
[1] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[4] https://docs.terra.money/docs/learn/protocol.html
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[6] https://www.anchorprotocol.com/
[7] https://www.anchorprotocol.com/docs/anchor-v1.1.pdf
[8] https://decrypt.co/98482/we-need-to-talk-about-terras-anchor
[9] https://twitter.com/OnChainWizard/status/1524123935570382851
[10] https://decrypt.co/100402/how-terra-ust-luna-imploded-crypto-crash
[11] https://www.theregister.com/2022/05/13/coinbase_ceo_assets/
[12] https://www.theregister.com/2022/05/16/judge_cryptocurrency_sanctions/
[13] https://www.theregister.com/2022/05/06/us_treasury_sanctions_blender/
[14] https://www.theregister.com/2022/05/14/eternity-project-malware-sale/
[15] https://www.cnbc.com/2022/05/09/what-is-terrausd-ust-and-how-does-it-affect-bitcoin.html
[16] https://www.coinbase.com/price/terrausd
[17] https://www.coinbase.com/price/terra-luna
[18] https://www.elliptic.co/blog/what-happened-to-the-3.5-billion-terra-reserve-elliptic-follows-the-bitcoins
[19] https://twitter.com/LFG_org/status/1526126703046582272
[20] https://twitter.com/ncweaver/status/1526192900547092484?s=20
[21] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YoMd51uoFvjvp27Hm2O0vQAAAA8&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[22] https://twitter.com/LFG_org/status/1526126719874109440?s=20
[23] https://whitepapers.theregister.com/
Do Kwon is better off, probably
BOFH in Training
I understand Do Kwon had another algo stablecoin prior to Terra. Which also didnt' work.
https://www.coindesk.com/tech/2022/05/11/usts-do-kwon-was-behind-earlier-failed-stablecoin-ex-terra-colleagues-say/
And now he wants to restart again.
https://www.bloomberg.com/news/articles/2022-05-16/do-kwon-proposes-creating-another-blockchain-from-terra-s-ashes
Sounds like he isn't doing all that badly out of this crash. And will not be surprised if he gets another bunch of investors jumping in for his 3rd attempt.
Re: Do Kwon is better off, probably - Certainly
HildyJ
Even in crypto, the execs always profit.
And any "system" that allows literally anybody to create as many "coins" as they want is doomed to failure. There are over 10,000 "coins" looking for suckers.
Re: Do Kwon is better off, probably - Certainly
Blank Reg
there will probably be no shortage of suckers no matter how many coins fail
"Two things are infinite, the universe and human stupidity, and I am not yet completely sure about the universe.” - Albert Einstein
The only downside
CommonBloke
To this dumpster fire is that it only temporarily plummeted the other coins' prices. Would've been really interesting if the other "stable" coins also had to face their actual real value.
"Stable" Coins
Anonymous Coward
All of this has happened before.
There's a semi-famous quote about the often tried, invariably failed Gold Standard and its other fixed-price cousins: "We don't use the Gold Standard. It’s not because we don't know about the gold standard, it's because we do."
This quote may be entirely apocryphal, but it is entirely appropriate. A currency pegged to a fixed value is an invitation for speculators to attempt to break the bank that backs that currency and underwrites the value.
Eventually the speculators will win.
Pop!