Original article by Zeke Faux & Muyao Shen, Bloomberg
Original editor: Unitimes
Last fall, at the suggestion of a friend, Odosa Iyamuosa invested $4,000 of her life savings in a cryptocurrency called Luna. The 28-year-old, who lives in Nigeria's capital Abuja, has researched the cryptocurrency himself online, and what he found made it seem promising. Luna’s price surged at one point, thanks to the success of another stablecoin closely tied to it, TerraUSD (UST). Some of the biggest names in the crypto industry have already invested in it, including Galaxy Digital Holdings, high-frequency trading firm Jump Trading, and the venture capital arms of exchanges Coinbase and Binance.
For Iyamuosa, Luna, the native governance token of Terra Chain, seemed to be his best hope of getting out of Abuja. In Abuja, many jobs pay as little as $2 a day or less, he said. He made some money selling knockoff Nike and Adidas sneakers to local buyers he found on Instagram. He wants to boost his savings to $16,000 and enroll in a data analytics program at a university in Toronto so he can land a job at a major US company like Netflix or Google. For a few months, his plan seemed to be working. The value of his Luna holdings doubled. “I sent money to my mom and my siblings,” he said. “I was able to eat well, too.”
Then this month Luna and UST crashed. UST is a so-called stablecoin, which means it should hold a constant value of $1. But it has fallen below $1 and falling further, with the Luna token, once worth more than $100, falling below a penny, all but erasing its total market cap of more than $60 billion. Iyamuosa said his coins are now worth only 3 cents in total. "I didn't even know what to do - I felt like I was going to die," he said. Iyamuosa said he decided not to kill himself because it would break his mother.
The soaring price of Bitcoin, Dogecoin and other cryptocurrencies over the past two years has sparked an intense FOMO (fear of missing out) where people fear they will miss out on their chance to get rich overnight. And advocates of so-called “decentralized finance” (DeFi, which allows users to store and borrow cryptocurrencies) promise that DeFi users will be able to earn super-high returns without super-high risks, just as traditional financial rules no longer exist. Same applies.
One reason for the popularity of UST is that holders can get20% profit. Marketing in the crypto industry has encouraged FOMO sentiment more broadly, saying investing in cryptocurrencies is a way to seize the future. “If you want to make history, you have to make your own decisions,” NBA player LeBron James said in one of several Super Bowl ads for cryptocurrency exchanges.
"I felt like watching my own house burn down."
Now social media is awash with stories of investors like Iyamuosa who say they lost their life savings on Luna. The collapse of the two cryptocurrencies triggered a collapse in digital assets, wiping out more than $300 billion in the combined value of all cryptocurrencies in the week ending May 13. As recently as last October, Bitcoin traded at over $60,000 and is now trading at half that price. For now at least, the whole crypto edifice looks even more shaky.
Not so long ago, supporters of Luna and UST spoke proudly as if they had reinvented finance. The token’s creator, Do Kwon, a 30-year-old South Korean who studied computer science at Stanford, has said he’s creating not just another form of digital cash, but a new financial system, A financial system that is free from government control, is cheaper to use, is faster, and pays savers higher interest rates. Do Kwon said in a promotional video:
"Creating a decentralized form of money on top of which you can build a whole new permissionless financial ecosystem is the holy grail of cryptocurrencies, and that's exactly what Terra is doing."
The systems surrounding Luna and UST are complex. We start with this stablecoin. As an alternative to traditional currencies, stablecoins have become an important part of the crypto world. Because they're designed to have a constant value, it's easier to use them to pay for things in the real world (Bitcoin and other cryptocurrencies fluctuate so much up and down that by the time the deal is done, the seller of the BMW may end up just Get tokens worth only one Honda). Do Kwon envisions Terra’s stablecoin being used globally for instant payments and transfers, cheaper than Visa, MasterCard and Western Union.
This concept is not new. But unlike other stablecoins, TerraUSD (UST) isn’t even backed by U.S. dollars or other assets in bank accounts. Instead, it should be worth $1, since it always allows users to exchange 1 UST for $1 worth of LUNA, and vice versa. If the Luna price is $10, then you can exchange 1 UST for 0.1 Luna, and then you can sell this 0.1 Luna on the exchange and get $1. If the Luna price is 10 cents, then 1 UST can be exchanged for 10 Luna.
As the Terra network becomes more popular, the value of Luna itself should also climb, as Luna holders (stakers) are able to accrue royalties from the network. Essentially,The front end of the Terra network is a dull, businesslike stablecoin, and the back end is Luna's get-rich-quick party.
Launched in 2020, UST did not gain popularity until March 2021 when Do Kwon introduced the Anchor protocol in the Terra network. Anchor is a bank-like crypto protocol where users can deposit their Terra stablecoins and earn 20% interest. As is common in the crypto space, Do Kwon claimed that the company behind Terra, Singapore-based Terraform Labs, wrote the software, but that the three pillars of the Terra protocol, Luna, UST, and Anchor, are all "decentralized" by users. control.
Maybe that's surprising? In fact, some in the Crypto world believe that the Terra system is unsustainable. After all, a 20% return is higher than the hedge fund returns that Bernie Madoff (the largest fraudster in US history) made up. But Do Kwon touted it as a safe alternative to banks such as Wells Fargo, and even said that other fintech companies such as Venmo might one day deposit user funds here. “The beauty and decentralization of this system is that it doesn’t require central intervention,” Do Kwon said on a podcast in January. "It's just neatly put together using a set of game-theoretic incentives."
In 2021, the price of Luna has increased by 100 times, creating a UST stablecoin with a market value of nearly 10 billion US dollars. Do Kwon tweeted that Terra is unstoppable and defiant to anyone who questions his ideas. Do Kwon's Twitter profile picture is an Iron Man-esque armored hero. "The (Terra) community bought Luna, so they must not be as poor as you," Do Kwon tweeted to a critic in March. Do Kwon fans started calling themselves "Lunatics".
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Billionaire investor Novogratz tweeted about his Luna tattoo before Luna and UST prices crashed.
But the UST has a flaw, as did money market funds or banks before deposit insurance was invented. Right now,If users lose confidence in the system, they may rush to sell or redeem their UST, and then others may follow suit, because they fear that if they wait too long, there is no guarantee that 1 UST will be able to buy/convert to 1 USD.In theory, the Terra network can always issue more Luna tokens to those who want to exit. But there are risks too.The more Luna tokens are issued, the further the price of Luna will fall, which in turn means the network will have to issue more Luna tokens, exacerbating its decline. On Wall Street, this is called"Death Spiral"。
“Their thinking was: ‘We’re going to print more Luna out of thin air to prop up the price of the UST stablecoin,’ but that didn’t really work,” said Steven McClurg, chief investment officer at Valkyrie Investments, an investment firm in Brentwood, Tennessee.You can't create more money out of thin air.”
The crisis began on May 7th.As asset prices generally decline, Luna prices have already begun to slide. The price fell to 99 cents after a trader swapped a large amount of UST for other stablecoins, sparking speculation about the risks of UST pegging to the dollar. At this point, Do Kwon has accumulated valueBillions in Bitcoin as Reserves, to shore up UST in an emergency, he expressed confidence in the stability of UST on Twitter. Do Kwon tweeted on May 8: "Those who wait for the earth to become unstable, will probably wait until the end of the human era." But the next day, Terra's redemption request continued, forcing Luna issues more tokens.
Luna's price fell by more than half, to less than $30, and fell by two-thirds the next day. Do Kwon exhorts his followers to persevere. “…stay strong Lunatics,” he tweeted. But this death spiral cannot be stopped.By the morning of May 13th, there were already 6.5 trillion Lunas in circulation, and the price dropped to $0.00001834. UST drops below 20 cents, because even though UST could be exchanged for a bunch of $1 worth of Luna tokens, no one was buying them.
Iyamuosa, the aforementioned Nigerian investor, said he spent the days after Terra's price crash in a mixture of doubt and disbelief. With only $20 left, he was still using Twitter and chat app Discord to find a crypto project that would make him earn his money back. His dream of moving to Canada to study seemed out of reach. "I literally have nothing left. Honestly, no job, nothing," he said.
Other investors also said they braced for ups and downs but never expected such a quick crash. Senior Bernier, 24, a flooring contractor in Montreal, said he lost about $250,000. "I always believed in Do Kwon," he said. “I feel like watching my house burn down,” one investor said in an audio support group on Twitter Spaces.
Do Kwon did not respond to a request for comment. "I am so sad that my invention has caused pain to all of you," he tweeted on May 13. He said he had a plan to revive his financial system, but not this time. stablecoins.
The cryptocurrency market appears to have stabilized. The most popular stablecoin, Tether (USDT), says it is well-backed by solid investments, even though USDT also recently dipped below $1. butTerra’s debacle has reinforced calls for stablecoin rules in the U.S., U.K., and South Korea.South Korean authorities have restarted a financial fraud investigation unit to investigate the Terra debacle, according to Korean news reports. Such a collapse could pose risks to the broader financial system if cryptocurrencies and the complex DeFi ecosystem continue to grow, the regulator said.
“A lot of people think that stablecoins are going to be as good as the dollar. They’re finding that’s not the case,” Rohit Chopra, head of the U.S. Consumer Financial Protection Bureau, said in an interview with Bloomberg Television on May 16.
