It All Comes Crashing Down: Terra and UST Collapse At Last

Terra is dead, and so too is the TerraUSD.

Just weeks ago, the Terra blockchain was worth over $40 billion. Its namesake stablecoin, the TerraUSD, had more than $19 billion worth of USD in circulation.

And this week, it all came crashing down.

Terra fell more than -97% in the last 24 hours, trading well below a penny at $0.0001905. 

TerraUSD, the Terra chain’s stablecoin pegged to the value of a dollar, was trading at $0.1517. It was down more than -60.5%.

Today, the value of both Terra and its TerraUSD stablecoin were worth a combined $3 billion. That’s a far cry from the cumulative $59 billion that they were worth before this whole mess unfolded. Terra was sitting #212 on the CoinMarketCap leaderboard, while $UST fell to #39. 

For the TradFi acquainted, I assume this looked (and felt) a lot like like when Bear Stearns or Lehman Brothers collapsed. On the bright side though, many people anticipated that Terra could collapse (and in this case, at least the housing market and global economy isn’t going to go with it.)

If not for the support of aspirational dip-buyers, who helped buoyed both coins during market volatility, it probably would’ve collapsed much earlier in the week. But as they say, old habits die hard.  The bulls ultimately ceded victory yesterday evening to the bears, short-bettors, and unstable state of the network network.

In conclusion: It’s a fantastic (and expensive) conclusion for two coins which used to sit among the top 10 cryptos by market cap. 

Or is it?

One question atop every trader’s mind is “what if?” What if Terra actually does come back? What if actually decides to give its stablecoin some new blood, namely by “backing it” with assets of real value? (Terra began to make strides to back $UST with Bitcoin … which reminds us: what ever happened to the Bitcoin during this whole thing?)

Terra’s Master of Stablecoin (and arguably the chain’s most foremost figure), Do Kwon, has indicated his desire to find a path forward for the crypto. In a tweet made this evening, he indicated that UST would not be the money for a decentralized economy. However, he indicated his desire to find the best step forward for Terra.

As part of that tweet chain, he published a revival plan for Terra’s ecosystem. That implies that $UST will probably not be apart of the path forward, at least for awhile, but Terra’s ecosystem was more than its stablecoins and the controversial Anchor Protocol which popularized $UST and Terra in the world of DeFi.

There were dozens of protocols and dapps. Among them were Terraswap, a DEX; Aperture Finance, a “cross-chain investment ecosystem” for DeFi stans; and the controversial Mirror Protocol, which allowed traders to purchase synthetic versions of U.S. stocks. 

As part of that plan, Do Kwon proposes that the community “reconstitute the chain” by resetting the chain’s token supply to 1 billion. The 1 billion $LUNA would then be distributed to Luna holders before the depeg (40%), UST holders (40%), Luna holders who held until the end (10%), and a community pool (10%.)

Do Kwon’s proposal excludes directly reimbursing people who lost money on $UST. It also excludes people who sold before $UST went to its new not-so-stable price point of $0.20. This is unlikely to stoke confidence among holders, especially small and scrappy retail investors that maybe struggled to understand the risk that they were taking on.

That’s why another proposal put forward by user FatMan desires to “put the small trader first.” He cited that $LUNA could not be salvaged, that the impact of the collapse hurt small traders disproportionately, and that not acting in the best interests of smaller investors would likely make it impossible to rebuild trust with investors. FatMan’s proposal would offer tiered repayment of USDC or USDT to smaller investors.

At this stage in the game, these proposals are just that: proposals. However, we’ll keep tabs on the developments as they emerge.

If you feel like the crypto world is crumbling down around you, you are not alone. Investors are exiting their crypto positions at a rapid pace. And sure, even though the markets up today, traders are still feeling a bit panicked.

Bitcoin ($BTC.X) was down nearly half from its historic highs this week, which might be partially because of the collapse of Terra ($UST.X) and Luna ($LUNA.X) – once darlings of the crypto world.

Every time this happens, it emboldens several parties that the crypto community hates to see smiling. The first is the mainstream press, which will stress that crypto projects rest on shaky economic foundations. 

And the latter party? Well, regulators. There’s no shortage of regulators lining up to get their jabs at crypto. 

These headlines embolden the CFPs and Wall Street titans of the world to uphold the pretense that “crypto is not backed by anything” and has “no real value.”

But weathering extreme volatility is considered a badge of honor in the crypto community. Holding an asset through its doldrums can result in massive amounts of street cred (if not financial gain). That could come with enormous rewards or with enormous losses.

One thing is certain: crypto investing, detached from any fundamentals that are specific to chains or protocols, is a highly speculative play — and it is likely to remain so for the immediate future. And dedicated investors almost exclusively fixate any of their long-term bull conviction cases around mass adoption. 

That’s why, hot take, a bear market might not be a bad thing. 

At first glance, bearish crypto markets may appear to hurt the adoption cause. Web3 mavens like to talk about onboarding “the next one billion” onto decentralized finance (DeFi) platforms. Low prices and high volatility do not exactly send positive market signals. However, drastic crypto drawdowns can help increase adoption in two ways:

First, market meltdowns provide a powerful impetus for mainstream media coverage. Even if the resulting thought pieces label crypto a ponzi scheme or ridicule the sector’s security practices, it keeps crypto in the public conversation. The more we talk about crypto, the more legitimate and deserving of analysis it becomes.

Second, bear markets provide the perfect breeding ground for experimentation and innovation. Reallocation of capital creates a winnowing effect that consolidates or eliminates lackluster projects. Meanwhile, the low-price environment makes it cheaper to conduct on-chain transactions and encourages more risk-taking from the committed core of crypto builders and investors. It is no surprise that highly successful projects, such as Uniswap and OpenSea, were founded during the 2018 bear market.  

Seasoned crypto investors may be licking their wounds, but crypto and DeFi innovation will not come to a halt. The investors who stick with it will be primed for takeoff whenever the next bull market arrives.  

Terra’s foremost leader, Do Kwon, once said that “By my hand, $DAI will die.”

Ironically, it is $UST that is dead. And $DAI? Well, they’re reaping the benefits of its death.

For the unacquainted, $DAI is a stablecoin — just like $UST was supposed to be. However, unlike $UST, $DAI is backed by real assets. 

$DAI is the brainchild of MakerDAO, which was one of the earliest DAOs formed in the world of crypto. In December 2017, MakerDAO launched $DAI on the Ethereum mainnet — making it one of the first DeFi apps on Ethereum, as well as one of the first DAOs and dapps on the chain.

In the modern crypto ecosystem, projects and protocols resembling MakerDAO’s foundational product are not uncommon. Dozens of stablecoins and lending/borrowing products are modeled after the $DAI ecosystem. However, many new crypto natives are unaware of the outsized impact that they had on the scene.

That’s why MakerDAO being back on top of the crypto TVL leaderboard is a pleasant surprise for long-term believers (and especially for long-term HODLers of the DAO’s $MKR token.) According to DeFi Llama, MakerDAO is once again on top. It boasts a TVL of $10.5 billion as of this writing. Thanks to this newfound leader status, $MKR became the only asset in the top 100 cryptos that is up on the week.

So, what does that mean? Well, it means that $DAI is sitting on $10.5 billion worth of deposits — which span asset types such as Ethereum, USD Coin, Uniswap, and Wrapped Bitcoin to name a few. Users deposit these assets into a vault to create something called a Collateralized Debt Position — which is just a semantically fancy way of saying that investors are creating “a loan against their crypto assets.”

As you’ve probably guessed by now, that loan is handed to the investor in $DAI, which is minted against a portion of the value of those deposited assets.

The loan is unlike a loan you would get on your car or house — that’s considered “unsecured credit.” Instead, in the world of $DAI, the borrowing you’re doing is a form of “secured credit.” That’s because you can only take out a portion of the value of the assets you’ve provided. If the value of the asset you’ve borrowed against falls below a certain price, a portion of it will be sold to cover the debt you borrowed from Maker.

As you’d expect, MakerDAO charges an interest rate — and it also has different rules (e.g: the liquidation ratio) for different collateral types, which are set in-part by the volatility and “predictableness” of the asset. You can see the finer points of the asset types on MakerBurn, a platform which shows various stats on the Maker-$DAI ecosystem.

Maker’s serendipitous hip and hop to the top is no coincidence given the timing of the Terra-$UST collapse. In fact, it’s almost certainly the cause: whereas $UST was backed using an algorithm and the value of various assets, $DAI has been built to last.

That’s one sign that investors might be shifting away from algorithmic stablecoins in the vein of $UST and headed towards decentralized alternatives which are sitting on assets of real value.