At a Mexican restaurant in North London a few weeks ago, a handful of small but remarkably discerning retail cryptocurrency investors predicted Terra and Luna would crash. Several of them scoffed at terra, or UST, a stablecoin whose price equivalence to the dollar is backed by algorithms and game theory rather than cash or collateral, and with the idea that it would hold its peg in the long run.
The project’s “Ponzinomics,” they told me, were just too risky. Only one of the investors seemed optimistic, out of nihilism rather than confidence in Terra’s solidity: He said the price of UST would rise well above one dollar per unit at some point, and the currency’s promoters would decide to just keep it there and rename the stablecoin as an “inflation-proof cryptocurrency dollar.” Another shrugged, but admitted all bets were off. “Until now,” he said, “this story has always followed the most humorous timeline.”
You can bet that many people today don’t feel like laughing. UST has lost its peg to the dollar (at the time of writing you can buy it on cryptocurrency exchanges for $0.58), and its sister asset Luna has plunged from $82 last week to $0.02. Much of the roughly $60 billion investment in these cryptocurrencies was pulverized overnight, and more will follow as people make an effort to get rid of their diminished coins.
Meanwhile, the broader crypto market has been in turmoil this week as bitcoin fell to $27,000 after bleeding 8 percent from its value in 24 hours, and many other cryptocurrencies are in decline. Tether, the world’s largest stablecoin, fell below $1 on Thursday.
With terra, we are witnessing the crumbling of a project based on the idea that you can create money – and assign it a specific value – if people are willing to go along with the pretense that money has the value that crypto companies assign to it. , similar to role-playing in a video game.
A small fraction of hardline crypto believers would answer that in the post-gold standard era of fiat money, most currencies are indeed just a collective delusion. But the fact is that there is no government, central bank, economy or actual practice that supports terra issues. As Frank Muci, a policy officer at the London School of Economics’ Growth Lab Research Collaboration, puts it: “It’s similar to a bank run, except it’s a run on nothing†
UST was marketed to the public as a stablecoin, a type of cryptocurrency whose value supposedly remains stable over time, creating a handy advantage against the wild price swings of other cryptocurrencies such as bitcoin or ether. With most stablecoins, that stability is guaranteed by currency reserves – whoever creates a dollar-pegged stablecoin should theoretically keep an equivalent amount of dollars in a vault somewhere – or other collateral, including crypto. Except that UST is an “algorithmic stablecoin” and has none of it. It is completely shielded from the real world and proud of it.
