The biggest story in the land of crypto so far this week is the Terra stablecoin, which has been proven to be none of them Strong and unstable.
You will probably already know that by applying the code principle is a law on monetary policy, Tara wants to become the reserve currency of the Internet. You too will know yes Does not go completely according to plan.
The idea behind algorithmic stable currencies – cryptocurrencies pinned to a reference asset – is a kind of bizarre version in the world of creating private money. When a bank registers a loan, it simultaneously creates a matching deposit on the liabilities side of its balance sheet. Stable coins backed by a reserve employ a similar mechanic, as IOUs are backed one by one with a balance sheet commitment. But with algo stablecoins, a government token replaces the balance sheet and the IOU is written in the protocol. It is, in the purest sense, creating money from the air.
Tara’s code includes a job proof administration token called Luna along with a bunch of Tara coins designed to maintain a one-to-one ratio with real-world coins – TerraUSD, TerraGBP, TerraJPY, etc. A person can exchange Luna for a terra-linked currency, and vice versa.
Of Terra White paper Speaks of “price stability through an elastic supply of money, made possible by stable mining incentives.” If it’s too crowded, so does Coinbase A good and comprehensive explanation. Essentially, liquidity automatically penetrates between the IOU token and the quasi-balance sheet token to create negligible arbitrage opportunities.
The growing demand for each of the currencies increases its supply. But since one Tara coin is always worth its linkage value to the Luna, there is an offer for Arbitrage to switch to the Luna whenever it is traded below the level. And whenever the terra coin is above its peg, the incentive is to go back by burning Luna. Simple, right?
Usually it’s about now with an explanation that first principles are superior. While there is undoubtedly value to a transaction protocol that offers censorship-free global transactions with low friction, which is what Terra promises, there is no reason for the activated tokens to have built-in value.
to enter, Distributed applications. The most popular, Anchor Protocol, is a money market for terra coins Which is almost his lack of understanding See in the planning. All users need to know is that deposited Terra tokens earn an annual return (token) of between 18 and 20 percent. Yes really.
The graphics above is from Abracadabra.money , Which is part of a collective of projects known as Frog Nation. Her offer included placing terra tokens inside an 8-fold lever box so that it would be more than Double money Within a year without risk! What can go wrong?
Well. . .
Remember QuadrigaCX, the Canadian Crypto-Ponzi platform That exploded shortly after the reported death of founder Gerald Cotton? amateur Investigation work In January, Frog Nation teamed up with Omar Danani (known as Michael Patrin), co-founder of QuadrigaCX whose criminal record provided the biggest exposure in Netflix documentaryOn the collapse.
Once this news was published, the whole universe was the token of the Frog Nation lousy. Losses of liquidated terra coins drowned Luna (whose price can be thought of as much as Difficulty in calculating Bitcoin) And almost broke the peg. The swing mechanism that kept order in the rising markets turned out to be weak in the falling markets, when traders sold both currencies. (With typical Jion, the techbros called this problem a Bank run .)
The good news is that Latra has a central bank. The Luna Fund Guard is a non-profit organization that pays the interest rates of 20% of its treasury. It also tends to intervene whenever things look bleak, as explained in an Excellent Twitter thread By Ava Labs President John Wu.
Unfortunately, Terra has a central bank whose MPC includes types of laser eyes like the founder of Terraform Do Kwon and Kiryat KanevOf Jump Crypto. The Luna Foundation has been strengthening its reserves over the past few months, but its choice of reserve property There was Bitcoin.
A huge sale over the last few days may be a Coordinated experience Break the tera stake, or just a death spiral once Luna’s market value drifts too far below Tara’s.
Since one Tara coin is always worth the value of the pair in Luna, the obvious trade once the stake was broken was to exchange Tara for Luna and then sell the latter. The transition further unbalanced the market and put pressure on the Luna Foundation’s safeguards Burning through His reserves are already diluted.
Additional capital deployment – stable guys
– Do Kwon 🌕 (@stablekwon) May 9, 2022
Excited types called this release a A moment for Lehman Brothers For the entire crypto space. This is probably an exaggeration. The sale of Bitcoin etc. over the last few days has been broad and boring macroeconomic parties and alternative stable algo currencies such as Dai(Which is guaranteed by user deposits that can be called interval) function so far as planned.
However, the next generation of DeFi entrepreneurs will have to calm some nerves in light of the capital destruction required to defend a project whose practical uses beyond convoluted financial engineering are, at best, Not proven:
And how long will the freeze last? Ah. . .
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