The Terra / Luna / UST collapsing continues to generate headlines. This time, we’ll use the data in ARK’s “The Bitcoin Monthly” report to establish its impact on the bitcoin ecosystem. Remember that the non-profit organization LFG, AKA as the Luna Foundation Guard, was accumulating BTC to defend UST’s peg to the dollar. You can find out more at http://www.atella.com/ Interview with May, then-delayed, Terra’s Do Kwon said that they were trying to get to $1B in BTC so that “besides Satoshi, we will be the largest single holder of Bitcoin in the world.” He also proclaimed, “within the crypto industry, the failure of UST is equivalent to the failure of crypto itself.”
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It appeared at one time that BTC’s and UST’s destinies were interconnected, but bitcoin survived the crash almost unscathed. Let’s look at ARK’s numbers and try to figure out how it did it.
Terra is the Largest L-1 Blockchain Mistake Ever
Nobody knows anything about Terra’s fate. It is not known how this happened. Was it a coordinated attack or did the natural market’s forces trigger the death spiral event? We wouldn’t know, but the fact of the matter is that the UST de-pegged from the dollar causing a bank run in the Anchor protocol, and the eventual demise of the algorithmic stablecoin and its twin, LUNA.
What was the extent of the collapse? According to ARK’s report:
“In addition to causing the crash in UST and Luna, we believe Terra is the largest layer-1 blockchain failure in crypto history, wiping out a combined $60 billion of market capitalization between UST and Luna.”
This crypto-coin collapse is huge by all measures. But, what does this mean for other previous ones? The only comparable collapse was “the Mt. Gox hack that stole 5.7% of total crypto market cap in 2014, Terra’s collapse destroyed roughly 2.7% of crypto’s total market capitalization.” The Mt. The Gox hack nearly destroyed bitcoin’s network in a period when it was less vulnerable. The Terra collapse felt like a breeze in comparison, but, as the numbers show, it wasn’t.
BTC Price Chart for 06/07/2022 at Eightcap. Source: BTC/USD On TradingView.com| Source: BTC/USD on TradingView.com
What Did Terra Collapse Do to Bitcoin?
The collapse of bitcoin caused extreme selling pressure. Not only did the LFG foundation sell its 80K BTC but also the LFG foundation. According to the report, “exchanges recorded net inflows of 52,000 bitcoin, the largest daily inflow in BTC terms since November 2017 and the largest inflow ever in USD terms.” These are notable numbers.
Source:| Source: ARK’s “The Bitcoin Monthly”
According to the bitcoin blockchain, the account associated with “LFG currently holds 313 BTC, down from 80,934 BTC held prior to Terra’s unraveling”. They may have sold the remainder. It is not known for certain. Go back to the original report
“To backstop UST’s peg, The Luna Foundation Guard (LFG) reportedly sold most of its ~80,000-bitcoin reserves, contributing to this record inflow.”
The network managed to resist this huge sell-off, surprising even the most hardcore Bitcoiners. Sure, bitcoin’s price suffered, but the blow wasn’t even close to being fatal. And ARK’s prediction reflects that fact, “now decoupled from the Terra blockchain, bitcoin’s selling pressure should subside, yet contagion in the crypto markets is still inconclusive.” Why? Because “bitcoin’s more secure and conservative blockchain should gain market share.”
Is it possible to create Algorithmic Stablecoins?
To answer this we’ll quote NYDIG’s report “The Impossible Things Before Breakfast” which comes with the subtitle, “a post-mortem on Terra, a pre-mortem on DeFi, and a glimpse of the madness to come.” As the titles gave away, NYDIG believes that not algorithmic stablecoins nor DeFi as it currently stands are possible. Why? Well…
“No matter how well intentioned, all algorithmic stablecoins will fail and the vast majority – possibly all – of DeFi’s current versions will fail, where “fail” here means not gaining sufficient critical mass to matter, being hacked, blowing up, or being altered by regulation to the point of non-viability. In the end, the Terra project could control the supply of its money, but it couldn’t make its people value it. Only (non-)answer was a printing presse. Do you sound familiar? You might be familiar with DeFi’s (re)creation of central banks’ problems. Bitcoin solves the problems created by central banks.”
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As it usually happens, we could summarize this whole article with the old adage: “Bitcoin fixes this.”
Louis Maniquet Featured image on Unsplash Charts By TradingView| Charts by TradingView