Reminiscences And Lessons From A LUNA Critic
Stablecoins are digital currencies tied to real currencies, and prices plummeted when the US dollar decoupled from it earlier this week. When UST lost its peg, it was evident that algorithmic stablecoins are inherently faulted assets. Its value plummeted as a result of this.
On Wednesday, Binance briefly banned withdrawals on Luna, and the Terra blockchain was fully terminated on Thursday night as a result of the Terra ecosystem meltdown. Let's understand various lessons from this crash in this article.
Crisis management requires more than on-chain oversight
The best option was to put the mint/burn gauge on hold. This would freeze UST liquidation into a tiny LUNA order book, however removing the gauge would necessitate a 7-day vote per protocol design. Delays in governance resulted in inferior choices.
Rapid decision-making is required for crisis management
The buffet offered to invest in Lehman Brothers at a price that angered the CEO in 2008. However, Lehman pushed Buffet to invest months later, but he declined. Therefore, it is not about the money, but about trust and reputation. Lehman did not listen to Buffet and crashed later. The global financial crisis of 2008-09 was a disastrous event in the financial services industry’s history.
The missed opportunities may cause issues in the future. So, it is very important to manage the crisis with timely action. However, LUNA failed to do so and the market crashed.
Don't aim for maximum efficiency
Despite the fact that space for error is the most significant determinant of long-term success, maximizing efficiency offers no room for error. The use of open money necessitates collateralization. You rely on confidence without the perception of collateral.
Growing requires revisiting fundamental assumptions
Sell Equity
TFL had to raise financing as a result of the decision to collateralize LUNA with Bitcoin. They accomplished this by converting LUNA to UST. The UST was then converted to Bitcoin. However, this raised the system's UST obligations. To win in this case, take the plunge and sell equity, even if it means losing money.
LUNA is doomed because of bridges and CEX liquidity
Before February, the only place to trade UST was Terra. This allowed LUNA to exert de facto capital controls over UST redemptions. Nonetheless, LUNA lost its ability to manage redemptions once liquidity was developed on Binance, ETH, and FTX.
Institutional idolization leads to sloppy thinking
TFL / Jump would not let it fail, and they had everything figured out, according to the LUNA community. Long-Term Capital Management, which had two Nobel Prize winners on its management team, failed in 1998. Remember, Smart does not imply invincibility!
Query the source
When simplicity is the hallmark of knowing, we are persuaded by a complication. A query about the source of Anchor's 20% yield was avoided. Staking yields/borrow demand / it's temporary / etc. were among the reasons given. You are the yield if you don't know where it comes from.
A lack of comprehension of history causes blindness to frailty
The design of LUNA was modelled after an emerging market currency with foreign exchange reserves. Capital flight and volatility result from a sudden lack of confidence. This played out classically on-chain as it does off-chain
Final thoughts
Crypto aficionados find it difficult to identify any practical value of their technology, particularly one that would compensate for the current drawbacks. Crypto investors were also impacted by high inflation and stricter monetary policy, causing the market's collapse. These occurrences demonstrate that cryptocurrency has grown in popularity and is becoming more mainstream.