Learnings from Terra UST failure
*If you are a busy guy, you can skip to the end to read my conclusion
We just witnessed the historical moment of crypto, and it concluded on a black Friday, May 13th, 2022, the end of Terra Luna and UST. In this article, I will not analyze why Terra failed and dig out the clues. There are so many experts out there have helped you spotted all the missing details and hints for the crash of Terra.
Terra Project falls from a market cap of $30B to almost nothing in just a few days. Billions of dollars were just evaluated overnight. The algorithmic stable coin, UST, was once seen as the future of payment token de-pegged and lost 90% of its value.
There are different versions of the story online talking about this attack. We probably will never know who did this. Investors of UST and LUNA may never recover their entire loss, but what we can learn from this incident is what helps us strive in the future.
Every year, the crypto market follows trends and hypes. People invest money in where all the noise is, and they forget about risk. After DeFi (decentralized finance), the hype is around #metaverse and #NFT. #Play2earn model recently also became quite popular due to Stepn’s success. In early 2022, many DAO projects popped up and raised money from members with some decentralized organization dreams.
But if you look at these “scam” projects closely, the economic model is quite simple. Taking UST as an example, many people get into UST because of the 20% staking profit from Anchor Protocol. The utility of the stable coin (i.e., UST) doesn’t (yet) exist at all. The price is sustained because new people continually put money into UST, and the demand is always high. Think twice; you know it’s not going to live forever.
Similarly, many #play2earn project offers high rewards for users to attract people to join the game. To play the game, users have to hold their tokens or NFT, which brings new money and makes the whole ecosystem float. However, play to earn attract people because of the earning part, not the play part. The goal is simple, earn money. Thus, the user will eventually sell the token and cash out. A new buyer takes over the inflated NFT or token to join this journey again with an exciting and happy face 🤗 . They forget about risk as well.
Are you going to spend a day in and day out playing a game just because you can earn money from it?
As long as no more new users join the game, the reward will decrease and eventually stop. That will create a domino effect to let more people leave the game. Meanwhile, token price and NFT price will crash.
Such collapse events will happen naturally or be manipulated by wealthy attackers. After the crash recently, Bitcoin returns to a market cap of 500B; it’s already big enough to mitigate 51% attack? Maybe, maybe not. But a project like Terra, UST MC is only 17B, which is also enormous but the attacker successfully brought it down in no time. No project can 100% survive; the economic model doesn’t work under absolute wealth dominance. Don’t trust any financial product easily 😉
So I made three crucial thinking below to help you mitigate risks (not financial advice):
- Can you still participate in such “Ponzi scheme” project, for example, Terra? The answer is Yes, you can, but you should be aware that you may lose everything you put in. (you: “this is nonsense…”. Then keep on reading the point #2. )
- You still want to take the risk because the return might be huge. Do some research yourself, do not just listen to others. However, it can only help you filter out low-quality scam projects. How can you avoid such a big project like Terra? No, you cannot. (you: “Really? it doesn’t help at all…”)
- After the research, you know there are risks, but you still don’t want to miss the “chance”. Last step: you need an Exit plan, a plan to help you reduce some risk and cash out at the right time. For example, the attack will most likely happen in a bear market because it wants to create a death spiral effect together with the downward market. If Luna market cap falls below UST market cap, de-peg will likely happen; hence set price warning and take action.
An exit plan will help you make right decision and keep your mind crystal clear in extreme situation. You need it.
In the end, I hold UST and I failed to take the actions I mentioned above. 😔