Terra is launching its cryptocurrency TerraUSD, but the coin has been met with opposition. A run on the bank ensued due to a poor marketing strategy and an unclear goal of how best to use it.
The “crypto crash today” was a day that shook the crypto world. The crash of TerraUSD caused a run on the bank, and many other coins followed suit.
TerraUSD only has one mission: to keep its value at $1 per coin.
It had mainly done that since its inception in 2020, seldom deviating more than a cent from its target price. As a result, it became an island of stability, a location where traders and investors could put their money in between trips into the usually frantic crypto market.
TerraUSD joined the excitement this week, falling more than a third on Monday and then falling as low as 23 cents on Wednesday.
Investors lost billions of dollars as a result of the crash. It spread to other cryptocurrencies, causing the price of bitcoin to plummet. Tether, another stablecoin, fell to as low as 96 cents on Thursday before reclaiming its dollar peg. Coinbase Global, the biggest crypto exchange in the United States, has lost nearly 81 percent of its value this year. On Tuesday, the company announced that it was losing subscribers and trade volume.
In recent years, the crypto market has grown into a parallel financial system with its own form of banks and loans. These attributes drew in more Wall Street interest and venture capital, putting money into crypto companies’ coffers. Some of that money was spent on marketing campaigns and lobbying that portrayed an image of a mature market.
However, TerraUSD’s decline raises serious concerns about crypto innovators’ plans to create a new financial system. It demonstrates that, despite the hoopla, the embryonic crypto system is still vulnerable to the disruptive bank runs that occur in the nondigital world.
Do Kwon, TerraUSD’s vocal founder, ordered that vast amounts of money be paid to save his project. He attempted to mobilize his fans on Twitter.
He commented just after 6 a.m. Eastern time on Wednesday, when his stablecoin was trading at half its original value, “Terra’s return to form will be a sight to witness.” “We intend to remain.” And we’ll keep creating a racket.”
Stablecoins are a cornerstone of the crypto financial system. Crypto aficionados must retain a connection to conventional finance’s government-backed currencies, where rent is owed, vehicles are purchased, and bills are paid. However, they only want to trade and invest in cryptoland, not dollars, euros, or pounds. As a result, stablecoins serve as a form of reserve money, an asset whose value is universally recognized and should not alter.
Stablecoins are used by both professional traders and regular investors, with roughly $180 billion in them as of Tuesday. Without ever touching a dollar or a bank account, a trader may sell a bitcoin for TerraUSD and then use the TerraUSD to acquire ether, another cryptocurrency.
Stablecoin firms have tried to persuade Congress that they are safe investments for investors. The fall of the TerraUSD has shattered that assumption—and with it, any notion of a safe haven in crypto.
Stablecoins are an effort to tackle the dilemma of how to create anything stable in a fluctuating financial system.
Some stablecoins try to do this by storing secure assets like Treasury bills in a reserve account: $1 in Treasury bills is placed in the account for every stablecoin issued. When you redeem a stablecoin, $1 in Treasury notes is deducted from your account.
TerraUSD has a more complicated strategy. It’s an algorithmic stablecoin that depends on financial engineering to keep its dollar peg.
The peg fell in previous efforts to algorithmic stablecoins, resulting in failure. Mr. Kwon and his colleagues thought they’d made a superior version that was less prone to runs.
Do Kwon, Terraform Labs’ chief executive officer, at his office in Seoul, South Korea.
Woohae Cho/Bloomberg News photo
Many cryptocurrency traders trusted him, and TerraUSD grew in popularity. Mr. Kwon predicted that the currency will become the most popular stablecoin, eventually displacing the dollar.
TerraUSD collapsed in a matter of days, after having grown to a value of almost $18 billion.
Mr. Kwon tweeted on Wednesday, “I realize the past 72 hours have been tremendously difficult for all of you,” addressing his fans, who are known as “Lunatics” because of TerraUSD’s sibling cryptocurrency, Luna. “I am determined to work with everyone of you to weather this crisis, and we will emerge stronger.”
On Saturday night, Jim Greco, a partner at crypto quantitative investing company F9 Research, was celebrating his birthday at Manhattan’s Le Bernardin when he received a notification saying TerraUSD had gone below 99.5 cents.
He instructed his staff to sell the currency, which was part of F9’s larger stablecoin portfolio. Mr. Greco said that his business thereafter placed a lucrative wager that the currency would continue to plummet.
Mr. Greco said, “We all knew it was going to collapse ultimately.” “We simply didn’t know what would be the spark.”
Traders claimed a series of significant withdrawals from Anchor Protocol, a sort of crypto bank established by engineers at Mr. Kwon’s startup, Terraform Labs, were the reason for the decline, which started over the weekend and snowballed Monday. These sites enable digital currency investors to earn interest by lending out their coins.
Anchor has fostered interest in TerraUSD over the last year by giving high returns of around 20% on TerraUSD deposits. This was far greater than the rates offered by standard dollar bank accounts, as well as what crypto investors might earn by lending out other, more traditional stablecoins.
Anchor, like other crypto lending protocols, would lend TerraUSD to borrowers who utilized the currencies for different trading methods or to gain built-in incentives provided by blockchain networks for completing transactions.
Critics, notably crypto investors who blasted Mr. Kwon on social media, questioned whether such returns could be sustained. According to the platform’s website, investors had invested more over $14 billion in TerraUSD in Anchor by late last week. The Anchor platform held the majority of the stablecoin’s supply.
TerraUSD lost its $1 worth due to large trades over the weekend. Investors pulled their TerraUSD from Anchor and sold the currency because to the unpredictability.
As a result, additional investors withdrew from Anchor, causing a chain reaction of further withdrawals and selling. Deposits in TerraUSD at Anchor had dropped to $2.3 billion on Thursday, down more than 80% from their high, according to the protocol’s website.
“There was a bank run,” claimed Michael Boroughs, managing partner of crypto hedge fund Fortis Digital Value LLC.
Nasdaq’s Times Square building has a video screen adorned for the launch of Coinbase’s direct listing in April 2021.
Richard B. Levine/Zuma Press photo
Some crypto market watchers believe TerraUSD was targeted on purpose. “This was a brief assault,” said Ronald AngSiy, vice president of Intellabridge Technology Corp., which lets individuals to earn interest on cash deposits by investing in cryptocurrency.
The stablecoin is designed to function like this: If the price of TerraUSD falls below $1, traders may “burn” the currency, removing it from circulation indefinitely, in return for $1 worth of fresh Luna units. This should diminish TerraUSD supply and enhance its price.
Traders may burn Luna and generate new TerraUSD if TerraUSD rises over $1. This should raise the stablecoin’s supply and bring its price back down to $1.
In principle, this implies that if TerraUSD goes below $1, traders may profit by purchasing the stablecoin at a cheap price and converting it into $1 of Luna. The concept is that traders all around the globe work together to maintain TerraUSD in line with its dollar peg, while Luna serves as a shock absorber, insulating TerraUSD from volatility.
Only if traders desire Luna does the system operate. When TerraUSD lost its peg this week, investors were not happy. Luna was sold in a frenzy.
According to data tracker CoinMarketCap, Luna lost about $20 billion in value in only a few days, losing virtually all of its worth. It had already had a dramatic run-up over the previous year as speculators gambled on TerraUSD’s continuous acceptance.
“Once consumers lose faith—and we’ve seen this previously in money-market funds and commercial paper—they’ll flee,” said Joe Abate, a Barclays research analyst.
Sellers of TerraUSD flooded purchasers on major crypto exchanges in a haste to get out, resulting in quotations for values below $1, which alarmed investors.
Terraform Labs’ representative claimed in an emailed statement that the infrastructure supporting TerraUSD has flaws. “We’re now working on a comprehensive approach to address many of the existing sources of risk,” he added, adding that it would be released publicly shortly.
A final line of defense was meant to exist. Mr. Kwon had attempted to secure the stablecoin by building a sizable war fund that could be used to maintain its $1 peg, similar to how a central bank in an emerging-markets nation could use dollar reserves to defend its currency.
He co-founded Luna Foundation Guard, a charity that declared earlier this year that it would purchase up to $10 billion in bitcoin. Terraform Labs contributed a significant amount of Luna to the reserve fund.
According to the fund’s online data dashboard, the fund had almost drained its $3 billion in bitcoin and other cryptocurrency resources by Tuesday as part of an emergency attempt to save TerraUSD. According to experts and dealers, the fund’s selling led to a dramatic decline in bitcoin’s price.
Investors angry over losses have been posting on social media sites dedicated to Luna and TerraUSD, arguing whether Mr. Kwon can lead a comeback.
He has promised to repair TerraUSD, which trades under the symbol UST. He highlighted technological ways to assist decrease the oversupply of the stablecoin and push price back up to $1 in a series of tweets on Wednesday.
Even if Mr. Kwon’s team is successful in reinstating the peg, the market’s trust in TerraUSD would be undermined, according to Mr. Boroughs of Fortis Digital Value. “It’ll take a long time to re-establish that trust.”
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Mr. Kwon, a Stanford University graduate who worked at Apple Inc. and Microsoft Corp. before diving into crypto, has had his image shattered by the TerraUSD problem. He is a vocal member of the crypto community on social media, often attacking his detractors.
“Anyone who disputes him will be called a fool,” said Eric Wall, chief investment officer of Arcane Assets, a Scandinavian crypto hedge fund. Mr. Kwon and Mr. Wall have sparred online over Luna and TerraUSD.
Mr. Kwon, a new father, named his young daughter Luna after his greatest invention, explaining in a tweet following her birth last month: “My dearest creation called after my best innovation.”
TerraUSD’s problems may raise doubts about stablecoins and drive clients to rivals. During TerraUSD’s turmoil, one, USD Coin, has maintained its relationship to the dollar.
USD Tether, which fell to 96 cents before reclaiming its peg, and coin are both backed by financial assets. The firms claim to have made investments equal to the value of each stablecoin.
Skeptics exist for all of these stablecoins, notably tether, which has long been accused of not being completely supported. Short sellers are betting on a further decline. Traders have increased their wagers against tether as a result of the TerraUSD crisis, according to Matt Ballensweig, co-head of trading and lending at Genesis.
“Tether is the most liquid stablecoin in the market and is 100 percent backed by a solid, conservative, and liquid reserve portfolio,” a representative for Tether Holdings Ltd., the firm behind the stablecoin, said. Tether has survived many ‘black swan’ cryptocurrency incidents.” During the market turmoil, the corporation continued to handle redemptions for its stablecoin, according to the spokeswoman.
Stablecoin issuers currently lack full criteria under current legislation. The Biden administration has lobbied Congress to establish legislation that would regulate such asset issuers in the same way that banks are regulated.
The administration’s worries about stablecoins, both conventional asset-backed and algorithmic types, have been reinforced by TerraUSD’s drop, Treasury Secretary Janet Yellen told Senate legislators on Tuesday.
According to Martin Hiesboeck, director of blockchain and crypto research at digital money platform Uphold, many of the investors who rushed into TerraUSD and Luna transactions had no idea what they were getting into.
Mr. Hiesboeck said, “You might have a group of people designing an algorithm and they could be 100 percent clear on how it works.” “However, the ordinary crypto-nerd does not read the…code.” They don’t bother to read the small print.”
—This paper was co-written by Elaine Yu and Andrew Ackerman.
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The “Crash of TerraUSD Shakes Crypto. ‘There Was a Run on the Bank.’” is an article published by Bloomberg that discusses how cryptocurrency has been having a rough time in recent months. It also includes some opinions from experts and investors about the future of crypto. Reference: is crypto the future.
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