The aftermath of Terra and Luna’s collapse – The Average Joe

    The aftermath of Terra and Luna’s collapse

    Victor Lei — Head of Research

    May 19, 2022

    May 19, 2022

    Last week, the world watched two of the largest cryptocurrencies, Terra and Luna, collapse in real-time — destroying over $50B in market value within a week. Terra’s creator, Do Kwon, has plans to keep Terra alive — by cloning the network.

    Catch up: Destruction of TerraUSD, the third-largest stablecoin

    Can the real Terra Luna please stand up

    Do Kwon and Terra’s affiliated organizations are facing countless investigations and lawsuits. But Do Kwon isn’t giving up and has given a new proposal to keep Luna alive:

    • Rename the existing failed network to Terra Classic and Luna Classic ($LUNC).
    • Recreate a new Terra blockchain (fork) and Luna ($LUNA) and ditch the UST stablecoin.

    Terra will distribute new $LUNA to Luna and UST holders before the attack — with a majority of the tokens having a lockup period to ease selling pressure.

    Whether there’s any value in the new $LUNA token and what it’ll focus on remains uncertain.

    Terra’s pains are USDC’s gains

    Since Terra’s implosion, over $4B has flowed into competitor stablecoin USD Coin ($USDC). Unlike algorithmic stablecoin TerraUSD, USDC is an asset-backed stablecoin.

    This means: For each $USDC in circulation, there should be an equal amount held in a regulated financial institution — which can be redeemed 1-1 by USDC holders. The problem with Terra was that it wasn’t backed by anything.

    This brings us to Circle, USDC’s creator, which announced to go public via SPAC Concord Acquisition Corp (NYSE:CND) in 2021.

    • Circle’s main product is USDC the fourth-largest crypto (by market cap) and second-largest stablecoin — which currently has ~$53B in circulation.
    • Since Circle announced its deal with Concord, the amount of USDC in circulation has more than doubled.

    That made Circle rethink its deal. Earlier this year, Circle made a new deal with Concord that doubles Circle’s valuation to $9B.

    But $9B is a considerable number for a company with only $17M in sales during the first quarter of 2021. With its growth since unknown, it’s difficult to say if it will join other fallen fintech and crypto-related stocks if it debuts in the public markets.

    What we do know is that USD Coin is catching up fast to the world’s largest stablecoin, Tether ($USDT).

    Investors: The largest stablecoin becomes unTethered

    Since Luna’s collapse, Tether briefly lost its $1 peg, falling to 97 cents as investors took out nearly 10% of its supply (~$9B). This highlighted the risk and controversy surrounding Tether.

    • USD (Circle) only holds cash or treasury bills in its reserves. Note: Treasury bills are backed by the government — considered the safest investments globally.
    • USDT (Tether) holds cash, treasury bills, corporate bonds, cryptocurrencies and other assets in its reserves.

    At the end of the first quarter, Tether held 14% of its $82B assets in riskier holdings (i.e., corporate debt, funds, commodities, digital currencies).

    The risk: It’s like if the bank took your deposits and started buying risky investments and trading stocks… wait a minute…

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