After a few months of volatility, in the last few days there has been a real meltdown of Bitcoin and cryptocurrencies in general. But something relatively huge has happened to the cryptocurrency ecosystem headed by the Terra Foundation and Terra itself, understood as the blockchain. What exactly happened?
Terra, in recent years, has launched its own token, called Luna. Since the Terra project turned out to be technically interesting, the market immediately liked the Luna token, which bought it with a certain conviction. The decentralized finance platform called Anchor was then launched on the Terra blockchain and, at one point, Terra launched its UST stablecoin which, like practically all American stablecoins, is pegged to the value of the dollar.
However, while the other stablecoins such as Usdt and Usdc remain pegged to the dollar by virtue of a mechanism that provides that for every stablecoin issued there is a real dollar as a guarantee in some bank (there are doubts, however, that it is just that 100% , but the speech would take us far), in the case of UST the mechanism is different: it is an algorithmic stablecoin, where the 1: 1 ratio with the dollar value is obtained using the “home” token Luna.
In practice, the Earth Foundation (i.e. the group of people who created it) monitors the constant value of the Moon through an algorithm and uses it as a reference for anchoring to the US dollar, burning or emitting quantities of the Moon in function of its value, so that, as a whole, it is an underlying compatible with the 1: 1 anchorage of the US dollar with the dollar.
To make the whole operation stronger and more stable, or perhaps because it was beginning to smell the fragility of the project, the Terra Foundation then bought a significant amount of Bitcoin to keep in reserve in case of need: before the crash, Terra Foundation had become the third largest holder of Bitcoin in the world: at the end of March he owned more than a billion dollars. But, much as the financier Soros one day attacked the lira – a weak currency at the time – by betting heavily on its collapse (and in fact causing it), so someone – it is not known who – in recent days has done something like this with Luna and Ust, having somehow identified a certain fragility in the project.
This someone has borrowed over $ 4 billion in Bitcoin, using an important part of it to open a short position on some exchange. A short position is basically a bet on the collapse of an asset, stock or currency. In this case of Bitcoin which, following copious downward sales, has begun to suffer heavy losses. But this was just a way to wet the ammunition of those who really wanted to attack: Earth.
In fact, more or less at the same time, heavy sales began on the Luna coin (previously bought with a part of the 4 billion Bitcoin borrowed), with the result that Ust began to no longer hold the peg (i.e. the alignment ) by 1: 1 with the dollar. At this point, since it was not enough to “print” always new quantities of the Moon since the attack was quantitatively very important, the Terra Foundation began to sell its reserve of Bitcoin, causing its value to fall further. The domino effect, and in some cases panic, did the rest. Because you can make good money even with low sales, whoever orchestrated the attack took home about $ 800 million. In the meantime, the value of Luna went from 73 dollars at the beginning of May to 0.00001 today, that of Ust, in a week, from 1 dollar (the fair value of a stablecoin anchored to the dollar) to 0.13 and the blockchain Earth was blocked.
Today, therefore, it is quite evident that the fragility of the algorithmic mechanism of a stable like Ust, based on a relationship with Luna, has shown enormous vulnerability to speculative attacks. There are not a few who think that, with this attack, a sin of pride has been punished: that of Ko Won, the founder of the Earth ecosystem, and his two-card games. Three, if we also want to add Anchor, which runs on Earth, razed to the ground in a few days: the remuneration promised to its users, very high, are gradually unsustainable results, and already in the days preceding the attacks there was talk of reserve of insufficient liquidity to continue trading. At the height of the attack Anchor was losing $ 10m per minute. In all this, Bitcoin is now considered by institutional subjects as a Nasdaq stock – which is a certificate of esteem towards Bitcoin. But when the Nasdaq collapses, the mother of all cryptocurrencies also follows, and with it more or less the others.
Speculative attacks, instability, high volatility, war, runaway inflation – no wonder the markets, on the whole, are not having a good time. And crypto, an asset class still very small in overall terms, suffers more than average in these cases, just like the shares of small listed companies do. There is no reason to think that this situation will not continue for the next few months. We are in a classic moment of the bear which, in itself, could also present opportunities: the professionals of classical finance are well aware that real money is made in the periods of the bear, more than in those of the bull.
Today, therefore, those who want to buy crypto today can do so at much lower values than a few weeks ago. But it is certainly wise not to be in a hurry, as always in these cases. Above all, and the Terra / Luna / Anchor / Ust fall demonstrates this well, it would be extremely advisable for people to study before buying. If those who bought these coins in the past had done it for real, they would have realized the extreme fragility of a system based on the interaction of two weak coins: two weaknesses do not make a strength, ever.