Reflections on Crypto Collapses: Terra Luna
May 23, 2022
🤝 Involved parties & tokens:
- Terraform Labs (Singapore): Developer & operator of the Terra blockchain, UST, and Anchor
- Luna: Governance token for investing in Terra
- UST: Decentralized, algorithmic stablecoin built on Ethereum that attempted to maintain a pegged value of $1.00, without USD backing (centralized stable coins are USD-backed)
- Anchor: Stablecoin-based lending DeFi protocol. Lender-deposited UST is used to make collateralized loans for which 19.5% interest was received.
- Luna Foundation Guard (LFG): Organization launched to build BTC reserves (and other collateralization reserves) to support UST’s $1.00 peg in times of market volatility
🧗♀️ What happened:
- May 7: UST began to ‘de-peg’ from it’s $1.00 target (UST had an $18B value just prior to the initial de-pegging)
- May 9: UST hit $0.35. Luna fell in parallel, dropping from $80 to $0.01
- LFG’s $3.5B in BTC reserves were deployed, but failed to stabilize UST
- $45 billion in investor dollars were lost, effectively overnight.
- Tremors were felt throughout the industry, token prices fell accordingly
😔 Who lost:
- Everyday retail investors :(
- Crypto institutional investors, including Jump Crypto, Three Arrows Capital, Pantera, Galaxy Digital, Coinbase Ventures, Shima Capital, Blockchain Ventures, Binance Labs, Huobi, Polychain, among others
- Traditional institutional investors, including Lightspeed Venture Partners
📝 Our takes:
While this is a tragedy (there’s no way around that.. a lot of honest people lost a lot of money), we do think this will be net positive for the crypto industry long term. Why’s that? Well.. for one, this has happened before (really, multiple times on various levels), and the ramifications were net positive over-time as the dust settled and the industry focused in on building/innovating.
The 2017 ICO burst is the biggest market burst to point to, and an interesting comparison here. It was one of the greatest and fastest speculative runups + bubble-bursts in recent history, making headlines around the world, as the industry cast into flames. However, callosal developments were born out of those flames:
- Most of the fluffy, shouldn’t-have-been-funded-anyways projects died off
- The ‘smart’ projects knuckled-down, focused in on building & innovating, and fought through to survive the ‘crypto winter’
- Many major industry breakthroughs emanated from this focused period, including the NFT boom, DeFi, ‘Web 3’, the ‘GameFi’ we see today, and other amazing innovations.. the ‘survivors’ eventually thrived
We at Slope are taking a page out of this book, by 1) focusing on survival (focusing on profitability, being conservative where prudent, and living to fight another day), 2) focusing on building, innovating, product excellence, and continuing to come together as effective teams and user communities, and 3) helping continue to drive the space into its next phases of evolution
🌇 Looking ahead:
The industry is already moving on well from the Terra catastrophe; the crypto industry’s resolve is amazing.. after all, it’s been through a lot. For instance, we were at Permissionless last week and there were very few negative sentiments or mentions of the crisis, aside from constructive reflections on what to learn and how to do things differently going forward.
Blockworks noted about the conference: “If anything, there’s a sense of relief that things are getting less frothy and more build-y” in reference to the vibes in the wake of Terra. Winter is a great time to cozy-up, innovate, and build.
In the words of Marc Andreesen, Co-Founder of traditional + crypto venture megafund Andreesen Horowitz (‘a16z’), “it’s time to build.”
And, in the words of our Founder, “The cold winter will eventually pass, and we will usher in the next spring. The longest way must have its close, and the gloomiest night will wear on to a morning.” I personally like this one :)
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