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Wednesday, May 25, 2022
HomeLatest NewsCrash in the world of cryptocurrencies: the Moon stopped revolving around the...

Crash in the world of cryptocurrencies: the Moon stopped revolving around the Earth

This week, the world of cryptocurrencies experienced what could end in the fall of Lehmann Brothers. The collapse of the Luna cryptocurrency led to the liquidation of $30,000 million in just 7 days. The normal volatility of the sector, with the usual fluctuations above 10% in one day on Wednesday, seemed like child’s play compared to the 96.6% drop in the value of the Moon in just one day.

This Thursday at 18:18, the official TerraLabs account confirmed on Twitter the paralysis of their blockchain: “The Terra blockchain has officially stopped at block 7,603,700.” The crisis of the Terra ecosystem, the promoter of Luna and the stable cryptocurrency TerraUSD, has caused considerable losses to its user community, which is estimated at more than 600,000 people across the planet. The cataclysm was total, blowing up the balance that united the two sister currencies: the Moon finally stopped revolving around the ecosystem of Terra. Notes of longing and even suicidal thoughts appeared yesterday in various social networks and forums.

The downfall of the Terra network caused a storm of unforeseen consequences throughout the crypto world. Weekly losses in the top 10 cryptocurrencies before the chain break ranged from -23% for Bitcoin to -46% for Solana. A trail of blood that led to $600,000 million — half of Spain’s annual GDP — leaving the crypto world in one week. After the crash, the total market capitalization of cryptocurrencies is still around $1.3 trillion, which is equivalent to all the wealth created in one year in our country. The most optimistic fear is that this may be the beginning of a difficult path with a protracted bearish period in the markets. Pessimists again talk about the death blow and write the death certificate of cryptocurrencies. Everyone fears that the crisis could jump out of the digital world and pollute the already difficult situation of the “real world” analog economy.

But what happened that the moon fell? The shiny currency has skyrocketed in recent months – apparently oblivious to the invasion of Ukraine, inflation and stock markets – when it reached its highest price in April this year: $119.18 for the cryptocurrency, a whopping figure that meant multiplying its value by a thousand of everything. for two years. The truth is that clouds of war and rising prices have been the perfect breeding ground for a currency to rise. Turbulence seeks stability, and this was supposedly a great quality of Luna and its sister currency Terra: stability with high financial returns: they paid 20% for what we might consider in the traditional banking world as fixed-term interest payments.

Luna was part of the Terra ecosystem created by TerraLabs to help develop the thriving world of decentralized finance (Defi), ending the volatility problem that has plagued the crypto world until now. Terra’s CEO, Do Kwon, a young South Korean, a smart 30-year-old computer science graduate from the prestigious American Stanford University, has developed a system that allows you to algorithmically create stable currencies without the need for real legal support. tender currencies. His twitter name is significant: @stablekwon.

In an effort to bring stability to the crypto world, Do Kwon created TerraUSD, the main stablecoin of the Terra ecosystem, in 2019 so that TerraUSD would have parity with the dollar, but without the need to back funds in real dollars or foreign currencies. , legal tender. The algorithmic system developed by Kwon tied the future of TerraUSD to the Luna cryptocurrency. By adding a complex system of incentives and checks and balances to blockchain technology, one currency reacted, fluctuated, and issued depending on the behavior of another. The mechanism was supposedly brilliant and efficient.

This was true until at least May 8, when TerraUSD fluctuated, momentarily losing parity with the dollar. What happened next, one can only guess. Some speak of speculative moves propitiated by the TerraLabs environment itself. Others are about the massive imbalance caused by the landing of a “whale” (as holders of a large amount of cryptocurrency are known in slang), removing almost $ 300 million from the system with one click. The parity mechanism began to falter, which started a spiral that the algorithm could not stop, so that one currency bled another. Dong Kwon’s dream turned into a bitter nightmare, breaking his laws of physics, the moon stopped revolving around Terra. Although in one of his latest tweets, a long thread in which he tried to explain what happened to his cryptocurrencies, he did not seem to give up: “Terra’s return will be a spectacle. We’re here to stay. And we’ll keep making noise.”

14/ Terra’s return to form will be a sight to behold.

We’re here to stay. And we will continue to make noise.🌕

— Do Kwon 🌕 (@stablekwon) May 11, 2022

Thus, the fall of Luna has completely focused attention on the rest of the stablecoins in the crypto world. A total of hundreds of projects are trying to maintain parity with fiduciary currencies (dollar, pound sterling, euro…) or with any commodity (mainly gold or oil). The set of stablecoins was added this Thursday after the paralysis of the Terra blockchain for a total of $166,188 million. Almost all of this figure (92%) is concentrated in just four cryptocurrencies: the giant Tether ($81,000 million); stablecoin Coinbase USDC ($49.5 billion); from Binance, BUSD ($17,000 million); and the original Ethereum environment, Dai ($6,500 million).

The first 3 theoretically have the support of their funds in hard and cold dollars; Dai uses a smart contract system so capital is secured by depositing an equivalent value in Ethereum. Doubts hang over the future of Tether, which has presented no problems so far, but whose liquidity has been repeatedly called into question by the Federal Reserve itself and the SEC (Securities and Exchange Commission), the US supervisory body.

Calls for regulation

The US Treasury Secretary spoke Tuesday in Congress regarding the Terra fiasco in a completely cautious manner, although he stressed the inevitable need for stablecoin regulation: “What happened with Terra just shows that it is a fast-growing product and that there are inherent risks. New products and technologies can provide opportunities to drive innovation and improve efficiency. However, digital assets can also pose risks to the financial system and further regulatory attention is needed.”

The senior U.S. official concluded the statements by emphasizing the importance and urgency of Congressional legislation specifically targeting stablecoins, which is expected to be presented to the body by the end of this year. The European Union is also working on regulation of the sector, which should be approved in the coming months. Other institutions, such as the IMF, have reiterated the need to “clarify” the legal status of decentralized finance to prevent it from being used for tax evasion, sanctions, or criminal activity.

Binance founder Changpeng Zhao criticized the TerraLabs team on Twitter for managing the crisis and was keen not to pervert technological innovation with financial engineering tricks: “We are in a new market with many innovations. Stablecoins are one of them. When they are hot, they are in fashion. When they fall, they can create vicious circles. Some innovations will be successful. Many others don’t. In the end, we must return to the basics. You have to create real products that don’t depend on short-term incentives or promotions, but have intrinsic value for people.”

5. I’m very disappointed with how the Terra team handled (or didn’t handle) this incident with UST/LUNA. We asked their team to rebuild the network, burn the excess LUNA issued, and restore the UST tether. So far, we haven’t received a positive response, or a big response at all.

– Czech Republic 🔶 Binance (@cz_binance) May 13, 2022

The fall of Luna affected the prices of other cryptocurrencies. Bitcoin remained below $30,000 for the entirety of Thursday, the benchmark of late after falling since last November when it reached its all-time high of $69,789. At 9:19 a.m. Thursday, he set the minimum threshold at $26,350. Already in the early hours of Friday, the price recovered above $30,000. The rest of the cryptocurrencies also resumed their rise in value on Friday, although the feeling of fear, uncertainty and doubt (the sector’s well-known FUD – fear, uncertainty and doubt) spread. The crypto world is still holding its breath, although the color green has finally returned to its screens.

In turbulent times, it is more important than ever for economic news to be well informed. All the consequences of the Ukrainian war for the world economy, explained from a different point of view.

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