TERRA LUNA: What Did We Learn From The Biggest Crypto Crash in 2022?
In May, the entire cryptocurrency world was shaken after Terra ecosystem’s stablecoin, UST, lost its peg to the dollar. Consequently, Terra’s governance token, LUNA, used in UST’s stabilization algorithm, suffered a 99% crash.
This crash is for sure the biggest in recent years and arguably the biggest ever in cryptocurrency history. As announced, Do Kwon, the co-founder of Terra labs, alongside other key players in the cryptocurrency ecosystem, has finalized a revival plan that seeks to rejuvenate the seemingly dead token and offer hope for investors. While hoping that the revival plan works and the Terra Ecosystem pulls the biggest comeback in crypto history, we can’t deny that bitter lessons have been learned, and this is the best time to address them.
We have a long way to go to achieve absolute decentralization
The goal of Satoshi Nakamoto was to create a decentralized network that isn’t accountable to anybody and isn’t set up hierarchically; this is probably the reason why they chose to be faceless and with an anonymous identity. In truth, having a face to the creator subtly encourages hierarchical decision-making, as we saw in the case of Terra.
Indeed, the Terra system comprises 130 validators; however, in the most crucial moments where vital decision-making was required, the entire community relied on Do Kwon, Terraform Labs (TFL), and the Luna Foundation Guard (LFG). As a result, decision-making was relatively centralized amongst a few people. In fact, the blockchain was halted without consent due to the desperation of the aforementioned parties to secure the network. Similarly, the community looked up to Do Kwon and the TFL to propose revival plans; hence, all crucial decisions seemed to operate across a few central options.
In truth, Do Kwon, the TFL, and LFG were all making their best bids to restore normalcy to the ecosystem; however, neutral observers had a lot to say about the genuineness of the ecosystem’s decentralization.
This has brought about debates on other blockchain networks like Ethereum. Unlike Bitcoin, Ethereum’s founder, Vitalik Buterin is well known; he attends conferences and speaks publicly on improving the network. Hence, it can be argued that his influence is colossal because he is openly credited as Ethereum’s founder; perhaps, if his opinion came from the lens of a well-wishing community member rather than a founder, there would be more objective arguments for and against it.
Maybe Satoshi Nakamoto foresaw this, and that’s why they remained anonymous; we never can tell. However, one conclusion we can all draw is that “decentralization isn’t absolute yet; we still have a long way to go.”
Algorithmic stablecoins aren’t yet perfect
Typically, stablecoins are backed by real-life assets or commodities. For example, the USDC is fully backed by cash such that each USDC can be redeemed for a dollar in cash. However, in 2019, algorithmic stablecoins started to become popular. Algorithmic stablecoins sought to offer crypto stability by automatically deflating and inflating supply to match market demands. The change in supply levels is based on a predetermined algorithm, which (in the case of UST was to burn $1 LUNA to create 1 UST).
Terra dollar (UST) became the biggest algorithmic stablecoin, which became massively adopted, becoming one of the top-10 cryptos by market cap. However, a series of enormous dumps happened, leading to an excess supply that $LUNA couldn’t quickly stabilize; this led to further FUD in the market, and the Terra ecosystem crashed. Terra dollar excelled in a green market, but during heavy sell-offs, it crumbled; this shows the inefficiency of the algorithm.
It is still widely believed that algorithmic stablecoins will help achieve decentralization while creating an economy that doesn’t rely on physical currencies and commodities. Hence, blockchain developers are encouraged to create practical mechanisms for algorithmic stablecoins.
High market cap coins aren’t immune to failure
It is commonly said that High market cap coins like Bitcoin, Ethereum, BNB, etc., are “safe” to invest in. However, with the crash of Terra, which was a top 5 crypto, we have learned that no coin is immune to failure. Hence, before investing in any coin, be sure to conduct profound research and ensure that you have sufficient faith in the technology.
Also, never invest all your equity into any “safety net.” The unfortunate event with LUNA could be other high-cap coins.
Be careful of leverage and margin
It’s become common for day traders to rely on margin and futures contracts to trade the market for colossal profits. Yes, these are ways to quickly make profits; however, it is advisable to avoid them if you are inexperienced. Furthermore, even for experienced traders, it is crucial to proceed with caution, as you can lose too much money if necessary stop losses aren’t set.
Never believe you’re too professional to be shocked. Always take caution.
Crypto is indeed the currency of the future and perhaps the greatest ever financial revolution in existence. However, for investors, it is important to take necessary precautions and always keep a balanced portfolio to mitigate the effects of crashes like these. Also, short-term traders should always endeavor to utilize stop losses always, and never get too greedy with the potential profits.
For developers and founders, it is essential to create a technology that can stand the test of bull and bear markets. A technology that works in a green market but cannot withstand heavy selling pressure is a failed one. Similarly, it is important to value true decentralization at all levels of governance, at creation, maintenance, and even in ugly times. Then, perhaps, a non-influential community member predicted the unfortunate event, and it could have been prevented.
There are a thousand lessons to learn from Terra’s failure, but these top the list. We sincerely hope that the revival plans work and the ecosystem is back on top again. A win for Terra is a win for the entire crypto world.