TerraUSD meltdown, part 5: Who killed TerraUSD: Malicious attack, or simply a weak design? - Crypto in Plain English - Episode 169 - by cryptohunt.it

TerraUSD meltdown, part 5: Who killed TerraUSD: Malicious attack, or simply a weak design?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Welcome back to part five of our one-week special on the TerraUSD collapse. Today: What caused the stable coin algorithms to stumble and lose the peg? If you haven’t followed from the beginning, please jump back a few minutes of listening time to episode 165.

Last time we talked about the magic machine that exchanges eggs for dollar bills to stabilize egg prices. And we learned that this is exactly how TerraUSD worked - using a fixed exchange rate for Luna, it guaranteed the price of Terra.

But we also said: A machine has its limits.

And so did the Terra Luna stablecoin rubber band: A black swan event, one where many things happened at once, gave it a mighty kick and it lost balance.

One major contributor was a project called Anchor Protocol. There, you could deposit Terra stablecoins for a crazy 20% interest, but as that became impossible to maintain, the project slashed interest rates overnight. People made a run for the 14 billion dollars parked there and flooded the Terra Luna stablecoin algorithm. As the machine couldn’t keep up, people were willing to take a discount on their stable coins to get out of the market, and that snapped the rubber band.

But even worse: Now there was a ton of new Luna, printed by the machine when it exchanged Terra for it. The more Luna it created, the more the Luna price drove down. Eventually the panic crept into the general crypto market and everything dropped. In total, the market wiped out over $80bn dollars.

And while there have been speculations about foul play, none of them have been proven. Some say it was a bad actor holding a massive short position. Others claimed popular hedge funds have something to do with it. But either are just conspiracy theories at this point.

And it doesn’t really matter. What matters is that many investors had money in an ecosystem without knowing the real risks. So, in the next final episode, let’s talk about what’s next for Terra Luna, stablecoins, and what we can learn from it.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.