What happened
May has been a rather dismal month for stocks, bonds, cryptocurrencies, and just about every asset class outside of a few commodities. However, for Terra (LUNC 0.26%) and its algorithmic stablecoin, TerraUSD (USTC -0.20%), it's been cataclysmic.
Many may suggest that Terra's LUNA and UST tokens were already on life support last week, when LUNA was trading below $0.01 and UST dropped below $0.20 (relative to its $1 peg). However, with LUNA now trading at around one one-hundreth of one penny, and UST now around $0.07, it's probably safe to declare this project dead.
Image source: Getty Images.
So what
Interestingly, there have been some proposals to reimagine the Terra ecosystem put forward by Do Kwon, Terra's founder, over the past week. I covered the initial proposal, which includes a fork of the Terra blockchain and the removal of the UST stablecoin, in a previous piece.
However, recent reports circulating today suggest that Do Kwon has amended the Terra 2.0 vote during the voting process. Generally speaking, this is unheard of, leading many to question whether this proposal is feasible or not. Thus far, the on-chain vote has secured a high enough percentage to pass (80% in favor). However, should one-third of proponents vote against the proposal, Terra 2.0 will not see the light of day.
Unsurprisingly, Terra's LUNA and UST tokens have continued their downward trajectory toward zero on this news.
Now what
This complete unraveling of faith in the Terra ecosystem has shaken investor confidence in the ability of algorithmic stablecoins to exist over the long term. However, there are far-reaching implications of Terra's demise for the broader crypto market.
Algorithmic stablecoins were viewed as the solution to a problem tnat has plagued the stablecoin market for some time. That is, that stablecoins must be backed by fiat currency and therefore are dependent on the stability of the U.S. dollar. For crypto maximalists, this doesn't jibe with the idea of a truly independent future in which digital currencies replace fiat money.
However, given the importance of stablecoins as a medium of exchange, the structural impacts this stablecoin collapse could provide the overall crypto market may outweigh the costs "purists" must endure via swallowing pride and accepting some sort of fiat backing. In this market, investors want certainty, making Terra's collapse a warning for investors looking at other algorithmic stablecoins right now.
