The industry is moving on from Terra's crash, but it shouldn't be forgotten. shahafbg analyzes the details of the catastrophic fall and determines what lessons other algorithmic stablecoins should take for the future.
in mid-May left the crypto industry scarred. Though there were some brave critics who understood just how thin the razor’s edge was for TerraUSD — now TerraUSD Classic — I think it’s safe to say that most people didn’t expect Terra to fail so fast, so dramatically and so completely irrevocably.on a plan to restart some kind of Terra 2.0 — a plan to salvage the layer-1 ecosystem without the UST stablecoin. The old Terra, now to be known as Terra Classic, is completely dead.
The HKD is a very interesting example in all of this because it’s pretty much your run-of-the-mill “algorithmic stablecoin.” It’s pegged to the U.S. dollar, even if not at a 1:1 ratio, and the HK central bank uses its vast reserves to keep HKD’s price in a well-defined ratio by trading it on the market.
The way the mechanism worked was, in principle, similar to HKD. If UST traded above $1, users could acquire some LUNA and burn it for its dollar value in UST. Crucially, the system assumed that UST was worth $1, so the LUNA burner can just sell the UST on the market for, say, $1.01 and make a profit. They can then recycle the profits into LUNA, burn it again, and continue the cycle. Eventually, the peg would be restored.
But we also need to mention the extreme reflexivity in Terra’s design. Demand for UST that makes it go above peg results in demand for LUNA, and thus, an increase in price. The keystone of this mechanism was Anchor, the lending protocol on Terra that guaranteed a 20% APY to UST stakers.