Terra Ecosystem is rowing towards the death sentence now. The last ten days have been very crucial for both the popular stablecoins LUNA and UST in the crypto industry. Today UST and LUNA are trading at $0.1758 and $0.0002457 respectively (at the time of writing). Both the stablecoins have tanked down 100% and have caused the de-pegging of the UST-US dollar.
Unlike other stablecoins or digital assets, UST is not backed by cash. Therefore, an algorithm binds the UST value to LUNA via a mechanism of Seigniorage where burning and simultaneous minting takes place. This process keeps the UST price at $1 always. Unfortunately, this mechanism broke last week, when a huge amount of UST was dumped on-chain leading to the demise of UST and LUNA in a matter of days. A whopping amount of $40 billion in value was wiped out from the market due to the sudden collapse.
Also read: Everything you need to know about Terra network and how it works
According to the mechanism of Seigniorage, new LUNA tokens are minted exponentially on the blockchain. To stop the token formation the Terra Blockchain validators had to suspend the entire network. Due to this all the withdrawals, depositing, and trading came to halt on almost all the exchange platforms.
The Terra blockchain has failed drastically and the founder Do Kwon has realized inevitable mistakes from its end. Recently, he rolled out a recovery plan for the entire ecosystem but it does not seem to be working at all. Also, people have started questioning the BTC reserves that Luna Foundation Guard (LFG) was accumulating in billions of values. Moreover, Ethereum and Binance founders Vitalik Buterin and CZ have broken their silence on Terra’s failure.
How did CZ react to the Terra Failure?
Binance CEO Changpeng Zhao ‘CZ’ is disappointed with the way Terra blockchain was handled which led to its collapse. This will eventually go to show biased thinking for almost all the stablecoins in the market. All this time Binance has been neutral and protective of all its users and projects on the Binance platform. However, CZ broke his silence on UST/LUNA trading through his Twitter official.
CZ informed through the official Twitter handle that they requested Terra Team to restore the network and burn extra minted LUNA. This will recover the UST pegging and will prevent the fallout. Failing to understand the deeper problem by the Terra team, Binance was forced to suspend the LUNA and UST pairs from its platform.
To avoid significant risk factors and further price crashing, Binance suspended the trading of TerraUSD and LUNA from its all platforms.
The co-founder of Three Arrow Capital Zhu Su and also an investor of Terraform Labs raised concerns over neglecting attitude on de-peg risks. According to Su, such risks were flagged long back by the market analysts and critics of the fast-growing ecosystem.
Vitalik suggests a compensatory plan for Terra
Whereas the Ethereum Co-founder Vitalik Buterin suggests a compensatory plan to Terraform Labs. According to him, Terra should focus on the averagely small holders of UST instead of large crypto whales. Going forward, he insisted on financial deposit insurance schemes for such circumstances.
Another Ethereum educator Anthony Sassano’s post drew Buterin’s attention where he openly stated that ‘algostable’ has become a propaganda term for both uncollateralized and collateralized stablecoins while both being completely different from each other. Vitalik also agrees with Sassano that the sheer experiments and unstable blockchains draw risks and phishing attacks compel people to lose money.
According to Sassano the developers and organizations must focus on public goods funding, governance/DAO (Decentralized Autonomous Organisation), decentralized applications, privacy and security tools, and finance.