TerraUSD (CRYPTO: UST) losing its peg to the dollar and the subsequent blow-up seen in Terra (CRYPTO: LUNA) was termed one of the “largest fiascos” in cryptocurrency market history by Frank Downing, an analyst with Cathie Wood-led Ark Invest.
What Happened: Downing said Terra’s unraveling originated from its price stability mechanism, which was predicated on the UST peg being maintained algorithmically using LUNA to absorb changes in demand for the stablecoin.
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“Although that strategy worked in relatively stable market conditions, a broad-based selloff decreased the demand for all crypto assets, including UST and Luna, enough so that the arbitrage necessary to stabilize the UST price became unattractive to investors,” said Downing, in a note seen by Benzinga.
Downing said the collapse of Terra might be the “largest layer-1 blockchain failure in crypto history.”
“Terra’s demise is one of the largest fiascos in crypto market history as measured by market capitalization affected relative to total crypto market cap.”
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Why It Matters: Downing compared the collapse of LUNA with the Mt. Gox hack dating back to 2014.
The analyst said while the hack stole 7% of the outstanding Bitcoin (CRYPTO: BTC), the collapse of LUNA has destroyed nearly 3% of the total cryptocurrency market cap.
The Terra blowup ushers in “stringent regulation” in cryptocurrencies, particularly stablecoins. Bitcoin and Ethereum (CRYPTO: ETH), which Downing labeled “conservative blockchains,” could gain market share in the cryptocurrency ecosystem, according to the analyst.
Recently, Wood purchased shares of cryptocurrency-linked companies on the dip.