What Terra Shutting Down Its Blockchain Means for Investors

Terraform Labs CEO says UST has failed.

Terraform Labs has halted its blockchain twice in recent days after the value of LUNA dropped to almost nothing. The network was restarted today after a nine-hour break, and several crypto exchanges have now delisted LUNA.

LUNA and the TerraUSD (UST) stablecoin weren't able to survive this week's extreme market turbulence. LUNA's price has plummeted from almost $90 a month ago to a fraction of a dollar in what's being called a "death spiral."

What's next for Terra?

After two days of silence, Do Kwon, CEO of Terraform Labs, today (Friday) outlined new plans to restart the Terra ecosystem. His new proposal echoed plans put forward yesterday by a group of developers called the Terra Builders Alliance.

In a post, Kwon admits the UST stablecoin has failed and can't be rebuilt. However, he thinks the ecosystem and community are what's worth preserving. He argued, "Although in distress, strong brand recognition and a name that almost everyone in the world will have heard about."

Kwon suggests resetting the network and distributing 1 billion LUNA tokens amongst LUNA holders, UST holders, and other parties. The new network would be entirely community run, taking Terraform Labs and Kwon out of the equation.

What it means for investors

There's a small chance investors might be able to recover some of their losses as a result of moves to revive the Terra network. But don't expect miracles. The Luna Foundation Guard -- a non-profit designed to support UST -- already emptied its reserves as it tried to prop up the failing token. The brand may be widely recognized, but trust in the network has plunged as quickly as LUNA's price.

It is heartbreaking to see stories of people who've lost their life savings because of Terra's collapse. The Terra Reddit forum contains helplines around the world for people to call, as well as stories from people who've lost significant amounts of money.

Going forward, here are two lessons all crypto investors can take away from Terra's failed stablecoin experiment.

1. Only invest money you can afford to lose

Cryptocurrency investment is high risk and there are no guarantees. Many people see the headlines about eye-watering profits and invest because they think they might get rich. Some cryptos have generated incredible profits, but many have failed completely as well. This is a brutal market, some of the technology is experimental, and even a top 20 crypto can collapse in a matter of days.

Never borrow money to buy crypto. Moreover, if the collapse of any individual crypto -- or the whole market -- might devastate your finances, then don't invest. Prioritize your emergency fund, retirement savings, debt payments, and other financial goals that contribute to long-term wealth over any crypto investments.

2. Stablecoins are not as stable as they sound

Stablecoins are a key part of the decentralized finance system, often offering high rates of interest to people who deposit on different platforms. Sadly, some people were tempted by the almost 20% APY offered on UST and moved their savings out of bank accounts and into the Terra network.

The trouble is that money in a bank account is protected by FDIC insurance against collapse. Money on DeFi platforms is not. Plus, U.S. dollars in a bank account may devalue slowly because of inflation but they won't collapse overnight.

There are a number of stablecoins out there that maintain their values in different ways. UST was an algorithmic stablecoin backed by the LUNA token, but -- in spite of assurances to the contrary -- it couldn't hold its peg in the face of extreme volatility.

If you're considering using stablecoins and DeFi platforms, research how that particular token supports itself. For example, USD Coin (USDC) is a fiat-backed stablecoin, and should have $1 in reserve for every token it issues. However, even fiat-backed tokens could fall. Never assume a stablecoin is as stable as the currency itself.

Bottom line

At time of writing, Terra's blockchain is up and running again and the community are mulling over ways to resuscitate the network. But there's only so much that can be done to restore people's losses. Terra's collapse is a horrible lesson for many investors who invested in good faith in a well-respected cryptocurrency.