Trend from May 7-12 (screenshot via CoinMarketCap)
Given the “decentralized finance” (DeFi) attributes that the cryptocurrency community has been touting, freezing the blockchain is definitely a blow.
Gu Ronghui, founder and CEO of blockchain security company CertiK, pointed out that although this is not the first time we have seen emergency operations affecting the entire chain, it has been a long time since the last hard fork.
The stampede wiped $200 billion off in a day after investors lost confidence. Even BTC, which is considered a big brother in the currency circle, fell to December 2020 levels (under $25,000) on Thursday morning, less than half of its November 2021 peak.
The situation quickly spread to other cryptocurrencies, such as ETH, which lost about 20% of its market value in 24 hours. The problems Terra encountered began on May 9, when the price of the UST algorithmic stablecoin began to decline sharply.
In order to maintain the stability of the UST currency, Terra has designed a special mechanism for it. As a result, in the case of the collapse of the broader market, the supply chain of the LUNA encrypted token that was matched in the opposite direction was greatly increased.
In two days, LUNA tokens have more than tripled. As a result, both it and UST fell into a “death spiral” and slumped.
This week’s nightmare is clearly not what Terra and its wider investors want. However, the reality is that UST has fallen to 40 cents (instead of $1), and LUNA has gone from a hundred dollars to almost worthless (about a cent).
In addition to Terra’s UST, other stablecoins have also been hit by market panic. For example, on Thursday morning, Tether (USDT), the largest in circulation, also fell below $1 (95 cents) on some exchanges at one point, and then recovered.
The reality of the sudden drop is a reminder that, even with the claimed peg to the U.S. dollar, the economics behind most stablecoins are still highly experimental and far less simple than ordinary people think.
On the other hand, under the chaos, US Treasury Secretary Janet Yellen has also been working hard to promote the regulation of stablecoins by the end of 2022, so as to avoid them posing a major risk to the entire financial market.
