Terra, How Comes?

As the Terra crisis deteriorates, some of the largest cryptocurrency exchanges in the world have begun to delist Terra’s UST stablecoin and its linked Luna token, citing a need to protect users from risk.

Binance, the largest cryptocurrency exchange by trading volume, halted the trading of Luna and Terra on Thursday. The OKX exchange — one of the top 10 by volume — took the same action. The de-listings come in response to a broader collapse of the Terra project. After the UST stablecoin fell far below its dollar peg on May 9th, an algorithmic process meant to balance the price at close to $1 triggered hyperinflation in the Luna token, crashing its price from $100 to less than 1 cent. Just two weeks ago, Terra’s market capitalisation was $30 billion; today, it is merely $1.058 billion.

Community reaction was no good:

Binance CEO Changpeng Zhao posted a Twitter thread explaining the situation and Binance reaction. “An exponential amount of new LUNA were minted due to flaws in the design of the Terra protocol. Their validators have suspended their entire network, resulting in no deposits or withdrawals possible to or from any exchange,” Zhao said.

On Curve Finance, one wallet sold USTs valued at $285 million. On Twitter, the news went viral. Anchor Protocol is a Terra (Luna) project in which UST was staked and gained a 20% APY. With the announcement of Massive UST Sales, everyone has withdrawn UST from stacking. Then everyone started selling UST. The Luna Foundation then transferred approximately 35000 bitcoins to the Binance exchange. Following that, the market went into complete chaos.

The Terra protocol is driven via the use of two core tokens, namely UST and LUNA. Network participants are afforded the ability to mint UST by burning LUNA at the Terra Station portal. Say, for example, the value of UST lies at $1.01, then users are incentivized to make use of Terra’s swap module to trade $1.00 worth of LUNA for 1 UST, thereby allowing them to pocket a net profit of $0.01. With UST far below the peg, users can mint an immense amount of LUNA… but it won’t be backed by anything of worth.

Other stablecoins seem to have escaped Terra’s fate: Tether, the largest stablecoin by market capitalization, has regained its dollar peg after dropping as low as 95 cents on Thursday. Still the downfall of Terra calls into question the real-world utility as well as the long-term viability of algorithmic stablecoins. In Jack Tao, CEO of cryptocurrency exchange Phemex, view, this entire episode is going to have a negative impact on the image of the crypto industry, especially in the eyes of investors. In particular, he believes that the crash could result in lawmakers becoming more strict around decentralized stablecoins