Binance CEO Changpeng Zhao (CZ) expressed satisfaction with the crypto industry’s resiliency in the aftermath of the historic collapse of the Terra (LUNA) ecosystem. He did, however, highlight some lessons that the industry should take away from the Terra debacle.
In a recent blog post, CZ stated that there are “many lessons” to be learned from the Terra crash regarding design flaws.
To begin with, when one asset is pegged to another asset with a third asset being used as collateral, the risk of a peg failure is inevitable, even if the asset is ten times overcollateralized. Because of the volatile nature of cryptocurrency, a collateral asset can lose more than ten times its value in a matter of hours.
Furthermore, there were design flaws in Terra’s burn-and-mint system that allowed holders of the stablecoin TerraUSD (UST) to exchange UST 1 for USD 1 worth of LUNA, resulting in an exponential increase in the supply of LUNA.
CZ slammed Anchor Protocol’s fixed annual percentage yield (APY) rate of 20%, which was intended to lure people into the ecosystem and persuade them to lock in their UST tokens. Many had referred to Anchor as a “Ponzi scheme” even before the UST collapse, claiming its APY was not sustainable.
The Anchor lending protocol had the bulk of circulating UST and was utilized as a major incentive for users to hold UST because of its high yield of 20%. The main takeaway is to avoid chasing APY alone. “Consider the fundamentals,” CZ stated.
CZ also discussed the Luna Foundation Guard’s proposal to reset the UST peg by lending billions of bitcoin. According to him, a sooner intervention from the Foundation might have saved the ecosystem.
According to CZ, there have also been “spillover” effects. Due to current sell-off pressure, the stablecoin tether (USDT) has recently deviated from its designated peg of 1 USD. There have also been market-wide liquidations in crypto, with some major players trying to sell all of their holdings.
For example, Delphi Labs recently proposed shutting down Mars, a decentralized finance credit protocol. Even though the Terra crisis was devastating, CZ believes the industry has held up well and demonstrated tenacity.
“Even without bailouts, all other major stablecoins withstood the shock, and most other crypto projects are fine,” he said.
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