The world of cryptocurrencies has experienced this week what may end up being its particular Lehmann Brothers fall. The collapse of the Luna cryptocurrency has led to the liquidation of 30,000 million dollars in just 7 days. The usual volatility of the sector, with usual fluctuations above 10% in a single day, on Wednesday seemed like a mere child's play compared to the 96.6% drop in the value of Luna in just one day.
This Thursday at 6:18 p.m., the official TerraLabs account certified on Twitter the paralysis of its blockchain: “Terra’s blockchain has officially stopped at block 7,603,700.” The crisis of the Terra ecosystem, promoter of Luna and the stable cryptocurrency TerraUSD, has caused considerable losses for its user community, which is estimated at more than 600,000 people around the planet. The cataclysm has been total, blowing up the balance that united two sister currencies: Luna has definitively stopped orbiting over the Terra ecosystem. The notes of anguish and even the suicidal thoughts appeared yesterday in various social networks and forums.
The fall of the Terra chain has generated turbulence of unforeseeable consequences throughout the crypto world. Weekly losses in the top 10 cryptocurrencies before the chain break ranged from -23% for Bitcoin to -46% for Solana. A trail of blood that has led to the departure of 600,000 million dollars from the crypto world – half of the annual GDP of Spain – in one week. After the collapse, the total capitalization of the cryptocurrency market is still around 1.3 trillion dollars, the equivalent of all the wealth generated in one year in our country. The most optimistic fear that it could be the beginning of a tough journey with a prolonged bearish period in the markets. The pessimists speak –once again– of a lethal blow and write the death certificate of cryptocurrencies. Everyone fears that the crisis could jump out of the digital world and contaminate the already complicated situation of the analog economy of the 'real world'.
But what has happened for Luna to fall? The glittering currency had soared in recent months –apparently oblivious to the invasion of Ukraine, inflation and the stock markets– when it reached its maximum price this April: 119.18 dollars per cryptocurrency, a colossal figure, which meant multiplying its value per thousand in just two years. The truth is that the clouds of the war and the rise in prices were the ideal breeding ground for the rise of the currency. Turbulence seeks stability, and that was supposedly the great quality of Luna and its sister currency Terra: stability with high financial returns: they paid 20% for what we could consider in the traditional banking world as the payment of interest for a fixed term.
Luna was part of the Terra ecosystem, created by the company TerraLabs, in order to promote the development of the flourishing world of decentralized finance (Defi), putting an end to the problem of volatility that has been characteristic of the crypto world until now. The CEO of Terra, the young South Korean Do Kwon, a brainiac 30-year-old graduate in Computer Science from the prestigious American University of Stanford, devised a system that allowed the algorithmic creation of stable currencies without the need for real backing of legal tender currencies. His twitter handle is significant: @stablekwon.
With the aspiration of transferring stability to the crypto world, Do Kwon created in 2019 TerraUSD, the main stable coin of the Terra ecosystem, so that TerraUSD would have parity with the dollar but without the need to back the funds with real dollars or foreign currency. legal tender. The algorithmic system devised by Kwon linked the future of TerraUSD with the Luna cryptocurrency. Adding to the blockchain technology a complex system of incentives and checks and balances, one currency responded, fluctuated and was issued based on the behavior of the other. The mechanism was supposedly brilliant and efficient.
It was at least until May 8, when TerraUSD suffered fluctuations momentarily losing parity with the dollar. What happened next is anyone's guess. Some speak of speculative movements propitiated from the TerraLabs environment itself. Others of the massive imbalance caused by the landing of a 'whale' (as holders of large amounts of cryptocurrencies are known in the slang) removing nearly 300 million dollars from the system with a single click. The parity mechanism began to fail, which triggered a spiral that the algorithm was unable to stop, so that one currency has bled the other. Don Kwon's dream turned into a bitter nightmare, breaking the laws of physics for him, Luna stopped orbiting over Terra. Although in one of his last tweets, a long thread where he tried to explain what had happened with his cryptocurrencies, he does not seem to throw in the towel: "Terra's return will be a sight to behold. We are here to stay. And we are going to keep making noise."
The fall of Luna thus puts the focus fully on the rest of the stablecoins in the crypto world. In total, a hundred projects try to maintain parity with fiduciary currencies (dollar, pound sterling, euro...) or with some raw material (mainly gold or oil). The set of stablecoins added this Thursday, after the paralysis of the Terra block chain, a total of 166,188 million dollars. Practically all of that figure (92%) is concentrated in just four cryptocurrencies: the giant Tether (81,000 million dollars); Coinbase stablecoin USDC ($49.5 billion); that of Binance, BUSD (17,000 million dollars); and the original of the Ethereum environment, Dai (6,500 million dollars).
The first 3 have in theory the backing of their funds in hard and cold dollars; Dai uses a system of smart contracts so that the capital is collateralized by contributing its equivalent value in Ethereum. Doubts hang over the future of Tether, which until now had not presented problems but whose liquidity has been repeatedly questioned by the Federal Reserve itself and the SEC (Security and Exchange Commission), the US supervisor.
The US Secretary of the Treasury spoke on Tuesday in Congress regarding the Terra debacle in an absolutely cautious manner, although highlighting the unavoidable need to regulate stablecoins: “What happened with Terra simply illustrates that this is a fast-growing product, and that there are inherent risks. New products and technologies can present opportunities to promote innovation and increase efficiency. However, digital assets can also present risks to the financial system, and further regulatory attention is needed.”
The high-ranking US official closed the statements by reiterating the importance and urgency for Congress to pass legislation specifically aimed at stablecoins, which is expected to be presented to the body by the end of this year. The European Union is also working on a regulation of the sector that should be approved in the coming months. Other institutions such as the IMF have reiterated the need to “clarify” the legal status of decentralized finance to prevent them from being used to avoid taxes, sanctions or criminal activities.
The founder of Binance, Changpeng Zhao, criticized the TerraLabs team on Twitter for managing the crisis, and aimed not to pervert technological innovation with financial engineering tricks: “We are in a new market, with many innovations. Stablecoins are one of them. When they're hot, they're in style. When they fall, they can generate vicious circles. Some innovations will be successful. Many others do not. At the end of the day, we have to go back to basics. You have to build real products that don't depend on short-term incentives or promotions, but with intrinsic value for people."
The fall of Luna affected the prices of the rest of the cryptocurrencies. Bitcoin remained below $30,000 throughout Thursday, a reference figure in recent times after the fall suffered since last November, when it reached its all-time high ($69,789). At 9:19 on Thursday, he set his floor at $26,350. Already in the early hours of Friday, the price recovered above 30,000 dollars. The rest of the cryptocurrencies also resumed rising values on Friday, although the feeling of fear, uncertainty and doubt (the well-known FUD of the sector – fear, uncertainty and doubt) has spread. The crypto world is still holding its breath, although green has finally returned to its screens.