FALLOUT LONG ROAD AHEAD JACOB SOFTWARE

Because firms sold around $30,000 of Ether in their own attempt to defend UST’s peg, Ether also plunged below $2000 for the first time since July 2021. The ripple effects were felt throughout the crypto ecosystem. “But the same forces act in reverse during bear markets and expose their fundamental flaws.

FALLOUT LONG ROAD AHEAD JACOB SOFTWARE

“The way these algorithmic stablecoins are designed, they have this upward force during bull markets, which is how they get so popular,” says Sam MacPherson, an engineer at MakerDAO and the co-founder of the software design company Bellwood Studios. Bitcoin hit its lowest point since December 2020, and Kwon’s ploy to save UST was unsuccessful. When he and the Luna Foundation Guard deployed more than $3 billion to defend the peg, in doing so he caused downward pressure on the market, causing other large investors to sell off their Bitcoin shares. (They did so to stop inflation, which has caused people to spend less money.)īut UST’s crash put another dent in the overall market, most centrally because Terra creator Do Kwon had bought billions worth in Bitcoin as a safeguard for UST. Terra dragged down Bitcoin and the whole crypto marketīefore Terra’s crash, cryptocurrency values were already on the decline, due in part to the Federal Reserve raising its interest rates.

Terra team members even acknowledged that this was the case-but likened the rate to a marketing spend to raise awareness, in the same way that Uber and Lyft offered severely discounted rides at the beginning of their existence. When this opportunity was announced, many critics immediately likened it to a Ponzi scheme, saying it would be mathematically impossible for Terra to give such a high return to all of their investors. UST’s peg was also theoretically propped up by its algorithmic link to Terra’s base currency, Luna.įor the last six months, investors have been buying UST for one main reason: to profit off a borrowing and lending platform called Anchor, which offered a 20% yield to anyone who bought UST and lent it to the protocol. UST, on the other hand, is an algorithmic stablecoin, which relies upon code, constant market activity, and sheer belief in order to keep its peg to the dollar. Some stablecoins derive their value from being fully backed by reserves: if investors decide they ever want out, the stablecoin’s foundation should theoretically have enough cash on hand to repay all of them at once. Stablecoins are used by crypto traders as safe havens for when markets in DeFi (decentralized finance) get choppy: instead of converting their more volatile assets into hard cash, which can be expensive and trigger tax implications, traders simply trade them for stablecoins. Its foremost product is the UST stablecoin, which is pegged to the U.S. Terra is its own blockchain, just like Bitcoin or Ethereum.

Fallout long road ahead jacob