The team at Terra has been struggling to save LUNA and UST after a sudden crash that sent the price of LUNA spilling down to pennies while UST was de-pegged from the US Dollar. Details of what really happened have left some people claiming that Do Kwon and his Terra Team were either incompetent in solving the apparent problem or were actually executing a rug pull to steal billions from unsuspecting community members.
However, according to people like Paolo Ardoino, the issues facing the Terra ecosystem, especially weren’t deliberate, but rather a serious problem that pointed to a flaw in the designed of the ecosystem as opposed to a rug pull. Paolo is the CTO of crypto exchange Bitfinex and Tether. Tether (USDT) is a stablecoin just like UST, but it’s bigger in the market. Paolo offered his opinion in a recent interview.
“It’s All Fun And Games Until…”
According to the Tether CTO, it’s very easy to manage a small value ecosystem as opposed to the intricacies involved in managing issues in a large, multi-billion coin market like UST and LUNA were.
For one, selling the backing collateral or reserves could work well to maintain the peg for a small stablecoin or cryptocurrency since a little push would create a notable market upswing and result in a pump to increase price and demand. However, for a larger coin with a market cap of over $15 billion, this mechanism may not work very well.
Paolo said,
“It’s all fun and games until you are a 10 billion stablecoin. And then it becomes much harder the faster you grow, the more you grow, right, because if you are a stablecoin, especially an algorithmic stablecoin..”
It Was A Cascade Situation
Going on, Paolo opined that the continuous crash of the UST and LUNA prices resulted from a cascade created by the selling of reserves. The reserves were small compared to the coin’s market cap, meaning that they weren’t enough to pump price but were achieving the opposite effect of a “bank run” whereby people started panic dumping instead of buying. The more the price fell, the more Terra saw the need to sell more reserves, and the more the dumping happened. The cycle continued until the LUNA’s price was reduced to almost nothing while UST was de-pegged.
DisClamier: This content is informational and should not be considered financial advice. The views expressed in this article may include the author's personal opinions and do not reflect The Crypto Basic opinion. Readers are encouraged to do thorough research before making any investment decisions. The Crypto Basic is not responsible for any financial losses.
