The collapse of Terra/Luna/UST continues to generate headlines. This time we will use the data in ARK”Bitcoin monthlyto establish its impact on the bitcoin ecosystem. Remember that the non-profit organization LFG, also known as the Luna Foundation Guard, has been hoarding BTC to protect UST’s dollar peg. AT then postponed May interviewTerra’s Do Kwon said that they were trying to get $1 billion in BTC so that “besides Satoshi, we would become the largest bitcoin holder in the world.” He also stated that “in the crypto industry, the failure of UST is equivalent to the failure of the cryptocurrency itself.”
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At one point it seemed like the fates of BTC and UST were inextricably linked, but the bitcoin network was largely unaffected by the crash. Let’s look at ARK’s numbers and try to understand how he did it.
Terra, the biggest L-1 blockchain failure in history
At this point, everyone knows what happened to Terra. Although no one knows how it happened. Was it a coordinated attack, or did the forces of the natural market set off a death spiral? We wouldn’t know, but the fact is that UST depegged the dollar, which led to bank runs in the Anchor protocol and the eventual demise of the algorithmic stablecoin and its twin, LUNA.
How big was the crash? According to the ARK report:
“In addition to the collapse of UST and Luna, we believe Terra is the largest layer-one blockchain failure in cryptocurrency history, wiping out a combined $60 billion market capitalization of UST and Luna.”
Huge size by any measure, but how does it compare to the previous cryptocurrency crash? The only comparable crash was “the Mt.Gox hack, which stole 5.7% of the total cryptocurrency market capitalization in 2014, and the Terra crash wiped out approximately 2.7% of the total crypto market capitalization.” The Mt.Gox hack nearly destroyed the bitcoin network at a time when it was more vulnerable. Terra’s collapse seemed like a breeze by comparison, but as the numbers show, it’s not.
BTC price chart for 06/07/2022 on Eightcap | Source: BTC/USD on TradingView.com
How did the collapse of Terra affect BTC?
In addition to the LFG fund reportedly selling its 80k BTC, the crash created a lot of pressure to sell bitcoin. According to the report, “the exchanges recorded a net inflow of 52,000 bitcoins, the largest daily inflow in BTC since November 2017 and the largest inflow in dollar terms.” These are significant numbers.
Bitcoin Net Flows To and From Exchanges | Source: ARK’s “The Bitcoin Monthly”
According to the Bitcoin blockchain, the account associated with “LFG currently holds 313 BTC, compared to 80,934 BTC held prior to Terra’s collapse.” Did the rest sell? Nobody knows for sure. Let’s get back to the report:
“In order to support the UST peg, The Luna Foundation Guard (LFG) reportedly sold the bulk of its ~80,000 bitcoin reserves, contributing to this record influx.”
To the surprise of even avid bitcoiners, the network withstood the massive sell-off without even breaking a sweat. Of course, the price of bitcoin suffered, but the blow was not even close to fatal. And ARK’s forecast reflects the fact that “now separated from the Terra blockchain, bitcoin selling pressure should ease, but contagion in the cryptocurrency markets is still inconclusive.” Why? Because “the more secure and conservative bitcoin blockchain needs to gain market share.”
Are algorithmic stablecoins even possible?
To answer this question, we will cite the NYDIG report “About the impossible before breakfastwhich comes with the subtitle “Terra showdown, DeFi showdown, and a glimpse of the madness to come.” Since the names have diverged, NYDIG believes that neither algorithmic stablecoins nor DeFi in its current form are possible. Why? Well…
“No matter how well-intentioned, all algorithmic stablecoins will fail, and the vast majority – perhaps all – of the current versions of DeFi will fail, where “failure” here means not having enough critical mass to matter, be hacked, blown up or changed. regulation to the point of non-viability. After all, Project Terra could control its money, but it couldn’t make its people appreciate it. The printing press was the only (not) answer. Sounds familiar? With no lender of last resort, DeFi is (recreating) the problems central banks are solving. Bitcoin solves the problems created by central banks.”
| TerraLabs sold over 80,000 BTC to save its stablecoin
As is usually the case, we could sum up this entire article with the old adage, “Bitcoin fixes it.”
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