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Terra?s Crypto Meltdown Was Inevitable


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Gian M. VolpicelliTo
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Frank Muci
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The New York Times
SOURCE: https://www.wired.com/story/terra-luna-collapse
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Summary

Several of them were scoffing at terra, or UST, a stablecoin whose price equivalence to the dollar is underpinned by algorithms and game theory rather than cash or collateral, and at the notion that it would maintain its peg in the long run.The “Ponzinomics” of the project, they informed me, were just too risky. It was always possible to exchange UST for luna and vice versa, and the blockchain’s own code always made sure that terra traded at a dollar a unit, while luna’s varying price was determined by algorithms keeping an eye on the market.That was supposed to keep its price stable by piggybacking on the work of arbitragers, investors who attempt to profit from market inefficiencies. If a sell-off of UST on cryptocurrency exchanges threatened to lower its price below $1, the idea was that smart arbitragers would rush to buy UST, and use them on its native blockchain to buy luna at a discount—propping up UST’s price in the process.If the opposite happened and UST’s price zoomed over $1 on crypto marketplaces, people would use their lunas to buy one-dollar-a-unit USTs on Terra’s blockchain and resell them on other platforms, bringing the price of UST down. “The large demand for UST was driven because of a savings protocol called Anchor on Terra’s blockchain, which promised 20 percent in annual percentage yield,” Ong says.

As said here by Wired