Binance CEO Shares Lessons Learned From Terra Fall, Says He is 'Pleased by the Crypto Industry Resilience'
Addressing the historic fall of the Terra (LUNA) ecosystem, major crypto exchange Binance CEO Changpeng Zhao (CZ) said that he is "pleased by the resilience the crypto industry has shown." However, he also shared some lessons that the industry should learn from the Terra fallout.
More precisely, in a recent blog post, CZ said there are "many lessons" to be learned from the Terra crash in terms of design flaws.
In the first place, when an asset is pegged to another asset using the third asset as collateral, there will always be a chance of a peg failure - even if the asset is over collateralized by 10x. That is because the volatile nature of crypto makes it possible for a collateral asset to crash by more than 10x in a matter of hours.
Moreover, there were also design issues with Terra's burn-and-mint mechanism, which allowed the stablecoin terraUSD (UST) holders to swap UST 1 for USD 1 worth of LUNA and the aggressive sell-off led to the supply of LUNA increasing exponentially.
"The most stupid design flaw is thinking that minting more of an asset will increase its total value (market cap)," CZ added. "Printing money does not create value; it just dilutes existing holders. Exponentially minting LUNA made the problem a lot worse."
CZ slammed Anchor Protocol’s 20% fixed Annual Percentage Yield (APY) rate, which was used to attract users to the ecosystem and convince them to lock their UST tokens. Notably, many had called Anchor a "Ponzi scheme" even way before the UST crash, arguing that it was not sustainable.
As a reminder, the Anchor lending protocol housed the majority of UST’s circulating supply, and it was used as a key incentive mechanism for users to hold UST with its high yields of 20%.
"Key lesson: don’t just chase high APY. Look at fundamentals," CZ said.
The CEO also touched on Luna Foundation Guard's attempt to restore the UST peg by lending out billions in bitcoin (BTC). CZ claimed that this could have saved the ecosystem only if the foundation had acted sooner.
"The entire incident may have been avoided if they had used their reserves when the de-peg was at 5%," he said. "After the value of the coins had already crashed by 99% (or [USD] 80 billion), they tried to use [USD] 3 billion to do the rescue. Of course, this didn’t work."
CZ noted that there have also been "spillover" effects. Most notably, sell-off pressure has recently led to the stablecoin tether (USDT) distancing from its intended peg of USD 1. There have also been market-wide liquidations in crypto, with some large players now seeking to exit all of their positions.
For instance, crypto investment firm Delphi Labs has recently put forward a proposal to shut down decentralized finance (DeFi) credit protocol Mars.
Despite all the distress that came out as a consequence of the Terra fallout, CZ still thinks the industry has fought off well, showing great resiliency.
"Even without bailouts, all other major stablecoins withstood the shock, and most other crypto projects are fine," he said.
At 8:55 UTC on Monday morning, LUNA is trading at 0.00019, up 12.5% in a day, down 11.5% in a week, and down 100% in a month. At the same time, UST stands at USD 0.065797, up 1.5% in a day, down 56% in a week, and down 93.4% in a month.
Meanwhile, the broader crypto market is seeing improvements today as well: bitcoin and ethereum (ETH), for example, are up 2.7% and 3.6% over the past 24 hours, and they are down 3% and 4.2% over the past 7 days, respectively.
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- Terra Blockchain Restarted, Binance Resumes LUNA & UST Trading Despite CZ Being 'Very Disappointed'
- LUNA Jumps as 273M Tokens Burned Despite Do Kwon Opposing the Idea
- Terra Adds an Amendment to Do Kwon’s Revival Plan, Survey Reveals UST Losses
- South Korean Government, Prosecution Turn up the Heat on Do Kwon and Terraform
- A Curious Coincidence – Major Terra Backers Break Silence on Same Day