The Terra LUNA crypto crash has sparked the debate on ‘true’ decentralisation
- The prices of Terra’s UST and its sister currency
LUNAcrashed last week, bringing the whole crypto market down with them.
- The cascading effect of the event has brought the debate around the decentralisation of crypto projects back into the limelight.
- How the attack was orchestrated is being compared by many to the bet George Soros’ made against the British pound in the early 1990s.
The consolidation of enough market influence in the hands of a few caused the algorithm between the UST stablecoin and its sister token LUNA to come crashing down. Not only did UST dip from its $1 peg to a mere 30 cents, but LUNA has also lost 99.99% of its value at the time of writing this article. In one week, LUNA has gone from being worth over $80 to less than $1.
There’s been a lot of finger pointing to try and assert the exact entity that caused UST and LUNA to crash in a death spiral – from Cardano founder Charles Hoskinson speculating that crypto exchange Gemini may be behind it, to a possible rug pull by Terra founder Do Kwon, whose numerous failed crypto projects have recently come to light.
We are aware of a recent story that suggested Gemini made a 100K BTC loan to large institutional counter-parties that reportedly resulted in a selloff in $LUNA. Gemini made no such loan.
What really caused Terra’s stablecoin UST and Terra to crash?
Whether it was one giant whale or collusion between large hedge funds, someone appears to have bought up around $1 billion worth of UST stablecoins, while shorting their Bitcoin holdings.
Massive withdrawals were made from Anchor, a decentralised finance (DeFi) protocol based on the Terra network. Deposits dove from $14 billion to $11.2 billion over just one weekend.
The existing negative market sentiment combined with fresh FUD — fear, uncertainty and doubt) — led to the perfect conditions for a bunk run — people rushed to pull their money out.
As the price of the UST stablecoin dropped due to the dramatic drop in demand, so did the value of LUNA, causing UST to ultimately lose its peg.
The way in which the attack was orchestrated is being compared by many to the bet George Soros’ made against the British pound in the early 1990s. One estimate puts the rug-pull at over $800 million. As things stand, no one knows the true culprit of this attack.
What does the future hold?
The cascading effect of LUNA and UST’s crash is being compared to the global financial crisis of 2008. The nosedive of LUNA and UST has wiped out more than $830 billion of the crypto sector’s total market value.
Not only have the tokens themselves lost value, but the 100 plus projects built within the Terra ecosystem — including non-fungible tokens (NFTs), decentralised finance (DeFi) platforms and web3 applications — are bearing the brunt.
Regulators have taken the opportunity to highlight the risks of crypto assets. Many are warning of the possible larger impact on financial markets with many bigwig companies now having Bitcoin and other crypto assets on their balance sheets.
Terra’s market crash also threatens to throw water on the fund-raising streak that crypto startups were counting on with venture capitalists reassessing their risk tolerance.
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