The incredible collapse of TerraUSD and its sister coin LUNA has had wide repercussions to the crypto market. Starting with the demise of a high-profile VC Arrows Capital (3AC), Voyager, and Celsius, other firms are struggling from having held large portions of the Terra token, which has dropped astronomically and affected value and confidence across crypto markets.
The problem with Terra started with its high APR offer. Initially, this generated a lot of interest, and forced the algorithm to reduce its APR when lenders outnumbered borrowers by a large margin. This caused the DeFi proposition to become unattractive, and people started exiting their USTC coin, since it did not offer any other intrinsic value.
The shrinking APR was magnified by a single transaction of 87M, being swapped out of the USTC pool to USDC, causing a momentary de-peg of the 1:1 dollar to the USTC currency and triggering the collapse. This particular transaction turned everyone’s heads and they all headed for the door. Exchanges tried to shut down some exit paths and Terra tried to sell off other reserves to prop up the currency but it could only do so much since most of the liquidity is in its native token.
If we go back in history to see a parallel, we observe that, ironically, the bank run in 1933 was made against the dollar as people fled banks to buy gold and the government had to force people to sell gold for the dollar at a Federal stipulated rate to stabilize the currency. Eventually the government gave up the gold standard to prevent a future bank run, and relied on the economy to sustain value in the dollar.
In a similar fashion, we need more usage of the currency, and a strong community belief in the inherent growth of value in the currency to be used as a backbone for a non-USD backed stable coin.
Pegging a stablecoin to decentralized storage tokens like 0Chain(ZCN), Filecion(FIL), Arweave(AR), Sia(SC), and Storj(STORJ), can be used for a stable token, allowing a digital asset to be tied to several storage economies and their related physical assets.Another basket of economies could be tied to NFT coins such as Polygon (MATIC) and Solana (SOL) as they become a larger part of our digital art culture and economy.
This solves the main criticism of crypto in that it is not asset-backed and only has one usage. Perhaps the current crypto turmoil is a wake-up call that novel risky schemes need to be looked at carefully to understand if the ecosystem is sustainable and a harsh reminder why DeFi should move towards decentralized systems that touch physical or digital assets which people will have a need for and not just look at an artificial APR that can result in a death spiral..
Author Brief Bio
Saswata Basu is a blockchain expert and the founder and CEO of 0Chain in Cupertino, California, USA. He is a visionary entrepreneur with 25 years of experience in privacy, decentralized storage, blockchain, data security, distributed systems, AI, IoT, cloud services, and wireless. At 0Chain he is building a fast, scalable, and secure decentralized storage platform. He holds MS and PhD in EE from UCLA.
