Crypto Markets ‘Stress-Tested’ After $26b Terra Collapse

“There is a general downturn in the financial system right now, and that means everything is tested under stress, so what can break, will break,” said Michael Gronager, co-founder of the world’s largest crypto data analytics firm. chain analysis. The Australian Financial Review from New York City.

“All of these projects start on a sunny day when everything is working, but when the storm comes, they can break, and we find out if they’ve invested enough in the problem of ‘what happens when all the money flows out?'”

Burning and hitting

Before Tuesday, terraUSD, or UST, was an algorithmic stablecoin that had attracted more than $18 billion in investment and provided the foundation technology for hundreds of smaller start-ups, including Australia-based Tiiik.

But unlike other stablecoins that are backed by real US dollar assets, UST used financial engineering to maintain its $US1 peg.

Tether, a stablecoin purportedly backed by US dollars and other US assets, also de-pegged from its peg to the US dollar on Thursday evening, falling 3 percent to $96.

The idea was that if the UST price fell below $US1, traders could “burn” the coin — or remove it from circulation permanently — in exchange for $1 worth of new units of another cryptocurrency called luna.

That reduces the supply of terraUSD and increases its price. Conversely, traders can “burn” luna if terraUSD rises above $US1.

In return for all this burning and beating, traders were rewarded with an 18 percent “interest rate” paid by the organization behind UST called The Luna Foundation Guard, founded by Do Kwon.

“You basically use these super high yields to attract enough people to your stablecoin, do the work of maintaining the peg, and then hope it reaches a critical mass where the peg stays stable and you can lower that high yield. that one will cost you a fortune,” said Josh Reyes, co-founder of Minke, a crypto interface tool.

“The idea is to automate and decentralize the function of a central bank trying to keep its own currency stable against the US dollar.”

Like a central bank that keeps a stockpile of foreign reserves, the team behind the Luna Foundation Guard had built a $3.5 billion bitcoin treasury to bet in case traders suddenly stopped supporting the peg and started a run. on the assets, and that’s what happened this week.

On Monday, the peg fell to as low as US69¢

This scared traders, who were used to getting $US1 for every trade, and the selling pressure mounted.

In response, the Luna Foundation Guard sprang into action and started using its bitcoin treasury to buy up UST and support its price peg, but it hadn’t counted on a sharply deteriorating bitcoin price at the same time, diluting its purchasing power.

“The guys at the Luna Foundation just didn’t have enough bitcoin to back their own peg, which is why it just cracked this week,” said Jesse Smythe, portfolio manager of Balmoral Digital, a Sydney-based digital asset manager.

According to blockchain analysis seen by the Financial Overviewwas sold for about $1 billion in UST over the weekend, enough to flood the market and disrupt UST from its $US1 Peg.

‘Stress in the system’

Do Kwon, founder of terraUSD, the stablecoin that nearly collapsed this week. Reuters

Australian-born cryptocurrency investor Richard Galvin was one of them, liquidating most of his holdings in luna, the digital token linked to the terra network, after detecting significant “system stress”.

He was unable to sell in full because some of his luna holdings were locked up and assigned to “strike” – loaned out to validate the underlying blockchain and earn rewards.

Mr. Galvin began buying the asset in mid-2020 when it was trading at around 23 per coin. He has since expanded the allotment, estimating that it has returned about $35 million to unitholders in its venture capital and wholesale funds, or about 40 times the original investment.

“That’s not to say our funds aren’t materially affected by Luna’s collapse,” said Mr. Galvin, chief executive of Digital Asset Capital Management and a former JPMorgan banker.

“We are reminded that when you invest in highly disruptive technology, there is a lot of uncertainty and volatility. We are investing in highly experimental and untested new assets and ideas that are more reflexive than anything most investors are used to.”

But Mr. Galvin was one of the lucky ones. By Thursday, traders had fled the stablecoin hailed as a technical breakthrough, sending it as low as US30¢, though it managed to climb back to around US50¢ on Thursday evening.

However, Fred Schebesta, founder of financial comparison site Finder, said there is still hope for a recovery. The Young Rich Lister had previously named terra a “beast to be reckoned with” and luna among his top coin pickers, but claimed he sold his property sometime between making those comments and this week’s crash, and couldn’t countenance himself. remember when.

“Terra did very, very well and then unfortunately the mechanism didn’t work,” Mr Schebesta told the Financial Overview† “They tried to get around that and tried to solve that by buying the bitcoin, but…unfortunately it didn’t work. It is really sad for crypto and it is also very sad for decentralization.

Kanish Chugh, chief of distribution at ETF Securities, said the terra collapse and broader crypto market sell-off had contributed to the “relatively muted” trading volumes experienced by his company’s bitcoin and ethererum ETFs that were trading on Thursday. Cboe Australia stock exchange were listed.

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