It has been a turbulent 72 hours in the crypto space to say the least.
With $UST, the algorithmic stablecoin created by Terra and backed by Luna, suddenly losing its $1 peg, the market has gone into complete turmoil.
In a move that many attribute to market manipulation (allegedly by Citadel), what seems like a coordinated attack on the Terra ecosystem has managed to uncover a fatal design flaw in the protocol which many in the crypto industry were warning about months in advance.
The question on everyone’s mind now is – Can the Terra ecosystem recover? Is this the end of LUNA Staking and UST Staking on Anchor?
In my humble opinion, the answer is not as straightforward as crypto-twitter and Reddit are chanting (“It’s going to 0!”, “it’s all over boys!”) it to be.
I think that even if this is the end of UST as we know it, it doesn’t have to be the end of the Terra ecosystem.
Let me explain.
Terra Recovery Plan: Painful, But Possible
Yes, the LFG (Luna Foundation Guard) may have burned its BTC reserves trying to save the day, and Do Kwon, Terra’s eccentric founder may have sinned in hubris, but that doesn’t mean that all is lost.
Terra could very well let the death spiral run its course, hit absolute rock-bottom, and re-introduce a new protocol design. Do Kwon will have to make some significant sacrifices, more notably of UST holder funds in order to do so, but that’s a plausible option.
Down the line, if the protocol manages to rebuild itself, it could offer a way for victims of the de-pegging to redeem their UST tokens for an amount that makes sense and wouldn’t create any significant problems for the V2 protocol.
The path to recovery could also include the current protocol design, but it doesn’t sound like a good idea. It would be hard to imagine anyone trusting their dollars to a stablecoin that has been proven to be unstable going into a possible bear market / recession year.
In addition, a new plan must be built in order to attract fresh capital, one which doesn’t include offering unsustainable 20% returns on stablecoin staking, which only seems to work during a raging bull market, but isn’t sustainable during the bear (and I won’t use the word everyone’s thinking about right now about such returns).
This is why the best course of action seems to be admitting that mistakes were made, lessons were learned, and a new protocol design is being introduced. One that will also take those mistakes into account, and offer a reimbursement plan for token holders.
This article is opinion only, not financial advice.