Before Terra’s $60 Billion Crash, There Was A Man Who Warned The World
In the crypto sector, hacks, frauds, Ponzi schemes, rug pulls, and crashes are all well-known problems. The recent collapse of the Terra ecosystem and its UST stable coin, on the other hand, appears to be unique.
Terra was billed as a significant experiment in creating a stable coin tied to the US dollar without relying on traditional financial securities or overcollateralized crypto assets as reserves. Its surprising failure casts doubt on that theory, and one of its harshest detractors declares victory.
Kevin Zhou is the co-founder of Galois Capital, a crypto hedge fund. He has been warning about the dangers of Terra for months, claiming that it might represent a “systemic risk” to the whole crypto sector.
“If you can’t figure out where the yield is coming from, it’s almost always coming from future bag holders.”
— Kevin Zhou, co-founder of Galois, a crypto hedge fund, and one of Terra’s harshest critics
The idea that the failure of one of the largest decentralized financial initiatives would spell the end of crypto looks to be exaggerated. If Terra’s collapse had occurred after a few more months of growth, the resulting market impact could have resulted in a Defi version of 2008, but instead, high-profile algorithmic stable coins may have been the main casualty.
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Cryptocurrency prices fell across the board as a result of the crisis; they eventually stabilized and recovered, but not without wiping $300 billion off the sector’s trillion-dollar total market value. Most importantly, it generated jitters in even the largest collateralized stable coins, which are backed by dollar and dollar-equivalent assets, though they, too, were back to normal by the end of the week.
Stablecoins are important in the crypto world because they allow traders to keep their money without leaving the digital asset ecosystem. During instances of high volatility, investors resort to them as a safe haven, or simply as a means of digital payment. Now, there are worries about whether TerraUSD’s unique mechanism will be phased out, at least for projects that get too big to fail.
Meet the Hedge Fund Manager Who Predicted Terra’s $60 Billion Collapse
“I wouldn’t be surprised if this is the end of algorithmic stable coins,” Hilary Allen, an American University law professor, said. “Defi cannot function without stable coins.” Stablecoins’ lack of trust would be disastrous for the Defi ecosystem.”
TerraUSD had a total market value of about $18.6 billion before losing its peg on May 8, dwarfed by its collateralized rivals Tether and USDC, which had market values of $83.2 billion and $48.7 billion, respectively, according to CoinMarketCap statistics. That prevented widespread contagion from spreading, but had it happened later, it could have been a different story.