In May, the currency circle experienced a free-fall price crash. At the center of the storm is UST, a project that has been saddled with the notoriety of a Ponzi scheme.
UST is an algorithmic stablecoin that is pegged 1:1 to the US dollar and is the third largest stablecoin in the world after USDT and USDC. Like all cryptocurrency proponents, UST believers hope to upend traditional payment systems.
But last week, UST investors panicked.
The thunderstorm started on the evening of May 8, and the giant whale account on Twitter went to the alarm. Binance exchange has a news of selling UST every hour, and the transaction amount is above one million US dollars. The sell-off de-pegged UST from the U.S. dollar, further triggering investor panic. The next day, a lot of money began to flee, and the price of UST fell from $90 to less than $1. The market value of more than 400 billion US dollars has evaporated in the currency circle.
The disaster has rippled through the entire cryptocurrency market, which collectively tumbled last Thursday, with bitcoin briefly falling below $26,000, its lowest level since December 2020. The currency market lost more than $200 billion in a single day that day.
As of 9 am on May 20, the price of UST has fallen to $0.082, a drop of 82% in a week.
In addition to causing a chicken feather to investors, this major earthquake in the currency circle may also have long-term effects on the wildly growing currency circle. “Investors have lost their life savings on cryptocurrency investments, but there are still insufficient regulatory measures to help investors avoid risk,” Senior Senator Elizabeth Warren of Massachusetts said in a statement to the media. “We Stronger regulations and enforcement are needed to regulate this highly volatile market."
How did it happen?
Understanding UST requires some blockchain knowledge. In fact, many of the fatal flaws of digital currencies are covered up by these incomprehensible technical terms, and most investors are just ignorant.
Simply put, Terra is a public chain, and the most important product on this chain is the UST algorithm stablecoin. Stablecoin is a safe haven currency for digital currency investors when they encounter a sudden change in the DeFi market. That is to say, when investors need to exchange the digital currency in their hands, they first convert it into stable currency instead of illegal currency, so as to reduce the risk of damage. Transaction fees and taxes.
The value of some stablecoins comes entirely from the reserves backed by them. When investors decide not to play, the stablecoin fund theory is that there should be enough cash reserves for investors to exchange. Most of the collateral for the world's largest stable currency comes from U.S. Treasuries, and behind UST are algorithms, continuous market trading, and the confidence to win...
Over the past 6+ months, Terra's DeFi platform The 20% yield paid by Anchor Protocol to borrowers has greatly stimulated investor enthusiasm for UST. As soon as this yield came out, many people said that it was a Ponzi scheme, and it was impossible for Terra to pay such a high interest rate to its investors. And the Terra team stopped pretending, and even admitted that this is the case, whether they like to play or not...
According to some blockchain experts, the collapse of UST last week was due to a group of investors with strong funds. Operation: They borrowed a lot of Bitcoin to buy UST, and waited for the UST price to drop to bring huge profits, which is simply shorting.
This led to the de-anchoring of UST and the US dollar, followed by a run, and finally the price of UST fell sharply.
The wealth of UST investors evaporated in a matter of days. On Reddit, the gathering place for investors in the currency circle, many people said that they had serious psychological problems because of this, and some even said that they no longer wanted to live. "I'm going through the darkest and most heart-wrenching moment of my life. The fact that I lost $180,000 doesn't look very real now," one investor wrote.
chain reaction
Before the collapse of UST, the currency circle actually experienced a round of decline. An important reason is that the Federal Reserve further raised interest rates, and people began to hold more cash in their hands.
But the collapse of the UST caused the market to take another hit, because Terra founder Do Kwon bought billions of dollars worth of bitcoin to protect the UST. When the de-pegging occurred, Do Kwon and the UST sister coin Luna Fund deployed $3 billion in Bitcoin to maintain the currency’s value. The move further sent bitcoin prices down. But even so, the operation to save the UST was still unsuccessful.
“These algorithmic stablecoins are designed so that they have an inherent drive to soar in value in a bull market, which is why they fire,” said Sam MacPherson, an engineer at software design firm Bellwood Sudio, “but the same drive In a bear market, the reaction will occur, further exposing the fundamental flaws of this type of stablecoin. This is the trigger for this crash.”
The entire currency circle ecology was affected by the collapse of UST. Some companies also sold significant amounts of ether to maintain the UST peg to the dollar, sending ether down to the $2,000 price range, a low since July 2021. Coinbase, the world's largest mainstream company in the currency circle, also lost 35% of its market value last week. The NFT ecological market value has also experienced a halving in market value in the past 7 days.
The entire currency circle is estimated to have lost hundreds of billions of dollars in this earthquake. Many people worry that the collapse of UST is likely to be the first domino that triggers the long-predicted "cold winter". “I think a lot of digital currencies will lose their value completely in the future, and investment in the currency circle will also slow down, because investors are busy taking care of their losses from the previous round of investment, just like when the Internet bubble burst.”
The future of the currency circle
It is already a trend for governments to strengthen the supervision of the currency circle, and the collapse of the UST will further accelerate the pace of supervision and the introduction of relevant regulations and strengthen the implementation of supervision.
Hilary Allen, a professor at the Washington School of Law of the American University, attended the U.S. Congress hearing on the risks of stablecoins in December last year and accepted relevant questions on the spot. Regarding the current major earthquake in the currency circle, it said that the collapse of UST previewed the situation that may happen when digital currency goes mainstream without supervision. “Such a situation may cause wider harm in the future, especially when the relationship between banks and the currency circle is getting closer, policymakers and regulators should see this crash as a good time to build a firewall and put the traditional financial system Separated from DeFi.”
Some U.S. congressmen also said in an interview with the media that they are already drafting relevant bills that require stablecoins to be subject to federal audits.
In recent years, ambitious blockchain developers have set out to develop an operational and secure algorithmic stablecoin that is more resistant to inflation than reserve-backed stablecoins and avoids government regulation. But all of these projects ultimately failed because of the unanchored. The Terra project, launched in 2018, has had several months of success, but is now experiencing one of the most painful failures.
Hilary Allen said that the collapse of UST will break down any expectations for the algorithmic stablecoin model, “It is very likely that after Terra, we may never see any algorithmic stablecoins appear. There can always be surprises.”
In the past few years, VCs have invested huge amounts of money in the currency circle, the most famous of which is the Silicon Valley venture capital firm A16Z. The agency was founded in 2009 by its two founders, Marc Andreessen and Ben Horowitz, who are active investors in technology companies, and together they have invested $8,000 in 45 startups including Twitter. The success of the Terra project is inseparable from the endorsement of well-known investors, including the American hedge fund Pantera Capital and the analysis company Delphi Digital.
But the collapse of UST has slowed down these VCs. Chris McCann, a partner at Race Capital, which focuses on digital currency investment, said in an interview with foreign media that they have heard that many transactions have either been cancelled or repriced, and some project investors have not even spoken to the founders directly.
Some analysts also said that these VC institutions made a lot of money by themselves, but their endorsement of stablecoins such as UST in the past made many ordinary investors ignore the risk of de-anchoring, causing these ordinary investors to become the biggest victims of the collapse of UST. .
The bigger debate lies in the ultimate meaning of digital currency: decentralization. Since its birth, digital currency has carried a decentralized mission: its value is not affected by official operations such as banks and governments, but is determined by sophisticated algorithms and networks. Digital currency enthusiasts say Terra’s crash was actually a successful stress test of decentralization: Bitcoin’s resilience amid massive sell-off proves Bitcoin’s viability — in experience After weeks of slump, bitcoin prices have recovered somewhat and are now back at $30,000.
But on the other hand, the collapse of Terra also exposed many of the centralized characteristics of digital currencies. For example, although the digital currency does not have a CEO, Do Kwon, the founder of the Terra project, can create such a project by himself, and then use his own identity to maintain the currency value of UST, which is exactly what the Federal Reserve does when maintaining the value of the US dollar. Although this effort to maintain the value of the currency ultimately failed.
And the call for strengthening the supervision of the currency circle has also intensified in several crashes, and it has become a purely speculative digital currency. Can it still complete its decentralization mission? Everyone may have a different answer.
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