Terra’s Crypto Crash Is Inevitable

in Mexico A few weeks ago, at a restaurant in north London, a small but very discerning retail cryptocurrency investor predicted that terra and luna would collapse. Some of them mocked terra or UST, a stablecoin whose price equivalence to the dollar is backed by algorithms and game theory rather than cash or collateral, and believed it would remain pegged to the dollar for the long haul.

They told me that the “Ponzi Economics” of the project was too risky. Only one investor seems optimistic, out of nihilism rather than belief in the solidity of terra: he says that at some point the price of UST will be well above $1 per unit and the token’s promoters will decide to keep it in There and renamed the stablecoin as the “inflation-resistant cryptocurrency dollar.” The other shrugged, but admitted that all bets were off. “So far,” he said, “the story has followed the most humorous timeline.”

You can bet a lot of people today don’t want to laugh. UST has lost its peg to the U.S. dollar (you can buy it for $0.58 on crypto exchanges at the time of writing), and its sister asset, luna, has plummeted to $0.02 from $82 last week. A good chunk of the roughly $60 billion invested in these cryptocurrencies was shattered overnight, and more investment will follow as people scramble to get rid of their dwindling coins.

Meanwhile, the broader cryptocurrency market was in turmoil this week, with bitcoin falling to $27,000 after losing 8% in 24 hours, while many other cryptocurrencies followed suit. The world’s largest stablecoin, Tether, fell below $1 on Thursday.

With terra, we are witnessing the collapse of a project based on the idea that you can create money and give it a specific value – if people are willing to pretend that money has the value that crypto companies give it, akin to playing a character in a video game .

A small group of hard-line crypto believers would counter that in the post-gold standard fiat era, most currencies are really just a collective delusion. But the truth is that there is no government, central bank, economy or actual use to back up the land issue.As Frank Muci, a policy researcher at the London School of Economics’ Growth Lab research collaboration, put it, “It’s akin to a run on a bank, just a run No. “

UST is sold to the public as a stablecoin, a cryptocurrency whose value should remain stable over time, creating a convenient advantage against the wild price swings of other cryptocurrencies such as Bitcoin or Ethereum . For most stablecoins, this stability is guaranteed by monetary reserves — whoever creates a dollar-pegged stablecoin should theoretically keep an equivalent amount of dollars in a vault somewhere — or Other collateral, including cryptocurrencies. Except that UST is an “algorithmic stablecoin” and has none of these. It is completely cut off from the real world and prides itself on it.

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