In just two years, cryptocurrency has been lured into Many new investors, whether they are individuals or institutions like Tesla or even countries like El Salvador. Thus, all of these virtual currencies reached a total capitalization of $ 3 billion last November. But since January, with the combined effect of rising US interest rates and falling tech stocks, Bitcoin, the most important of these cryptocurrencies, has lost 60% of its value.
The most violent crash affected the earth’s treasuries, which is the same “stablecoin” linked to the cryptocurrency Luna. As its name suggests, this digital token, in normal times, promises to back its value in the US dollar, at a fixed parity of 1 UST = $1. Its success owes much to the Anchor platform, a protocol that allowed investors to generate a fixed interest rate of close to 20%, by doubling trade around the floor vaults. So much so that this stablecoin has become, by value, third in the crypto world.
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Only then, at the time of this writing, at the end of May, floor cabinets were trading only about 6 cents on the dollar, a loss of 94% of their value! Meanwhile, Luna is down 99.99%, dropping in one week from $87 to $0.0001. In a few days, more than $40 billion of capital has evaporated. How do we explain such a correction? It should be noted that unlike the best known stablecoins, terrestrial treasuries were not built on the value reserves that the company forms at its origin, but on an algorithm that made them decentralized and independent of any entity.
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To maintain parity, a judging mechanism has already been established between Luna and UST. In detail, if the ground tank drops below a dollar, each user can destroy 1 UST, for 1 dollar of Luna. On the contrary, if the ground tank rose above the dollar, it was necessary to burn 1 dollar of luna, to get 1 US dollar in return. But all it took, on May 7, was a loss of confidence, fueled among other things by a bitcoin drop, massive treasury sales, and the stablecoin no longer being able to secure any anchor. Despite the efforts of the Luna Foundation Guard (LFG), the non-profit organization responsible for its development, ground tanks are never expected to return to their original parity.
It is difficult to say whether this catastrophe could have been avoided. The joint protocol between Luna and UST has already seen the parabola rise, without providing sufficient reserves to operate in the event of massive sales. It has also been deployed on many blockchains, and on many exchange platforms, making price management more complex than ever.
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But in every accident, there are winners and losers. After very early venture capitalists bet on Luna and UST, they were able to turn a profit. Specialized exchanges such as FTX, Binance or Curve, which recorded exceptional sales volumes, linked to the panic of their owners, are also profiting, thanks to the exchange fees and the liquidation of the positions created. The whistleblowers who predicted Luna’s downfall, finally, are certainly the ones who benefited the most from this fall, through their exposure to the media, but also from the speculative gains made.
The losers are the investors who got stuck with the lunas, those who owned the floor cabinets and couldn’t get rid of them in time, the traders who bet on the luna’s rise, and finally, the companies that passed on the Anchor. Moreover, this collapse will put stablecoins in the sights of the regulatory authorities, adding to the mistrust in the sector.
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Sure, a bailout was planned through the creation of a new blockchain, but once trust is lost, can it really be restored? Both the Covid crisis and the war in Ukraine have deeply affected our economy, and many are talking about a possible recession. So it will be useful to see this new cryptocurrency ecosystem in action after these serial failures. Will it continue to follow the stock indices or will it emerge from its resistance and emerge stronger?
* Artem Sinyakin is one of the founders of Oak Invest Consulting