Although Terra Has Crashed, DeFi Evangelists are Still Optimistic

Despite Terra’s recent collapse and widespread concern about the stablecoin, DeFi supporters continue to advocate algorithmic stablecoin. After the crash of Terra ( UST), supporters of DeFi, especially those of algorithmic stablecoin, believed that the future of DeFi depended on the existence of stablecoin and refused to cancel it.

“An algo stablecoins will exist for the next five to seven years,” said Hassan Bassiri, who works for Terra’s supporter Arca. Algorithmic stablecoin is a subset of stablecoin, that is, special digital assets linked to some legal tender. In order to maintain the link with legal tender, the funds usually held by stablecoin issuers can meet the large-scale withdrawal of holders who want to convert their coins into cash.At least, in theory.

On the other hand, algorithmic stablecoin relies on the combination of smart contract and computer code to maintain its linkage with legal currency.”If you really want to do these things, you have to have this really sharp technical ability, but also have this crazy wonderful vision,” said Tarun Chitra, CEO of gauntlet, a cryptographic financial modeling platform.

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Trading Volume is the Key to the Collapse of DeFi and Terra

Terraform Labs, the company behind UST and Luna, relies on deposits to the anchor protocol, a cryptocurrency bank, to maintain a balance between Terra and Luna. Terraform Labs offers 20% annual return to targeted Terra tokens, encouraging investors to invest in UST with funds from stimulus checks after the covid-19 pandemic.

High yields depend on large deposits. However, when the stimulus funds dried up as the central bank stopped the stimulus plan, the investment in decentralized projects, including UST, began to decline, eliminating a key pillar of decentralized Finance: – the volume of transactions in and out of Anke. However, transactions involving UST occur elsewhere in DeFi.

When an entity or group of entities use the DeFi protocol curve to replace UST with other stable currencies usdc, tether and Dai, UST shows the first sign of danger. As a result, the price of UST has fallen from its peg to the US dollar.

When UST falls below $1, traders can “burn” a UST by purchasing a sister token Luna worth $1, effectively increasing the scarcity of UST and pushing its price back to $1. As UST holders begin to burn their UST in exchange for Luna, Luna is collapsing and needs more Luna to make up for $1. Finally, the permanent algorithm caused UST to fall to $0.20 on May 11.

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The Sun Will Shine Again

In a recent interview with Bloomberg, Tron founder Justin in sun defended Terra and admitted that there was a problem with the algorithm stablecoin, from which new projects can learn. He uses the dollar arbitrage mechanism to maintain the stability of Terra’s currency. The link of the stablecoin will be funded and maintained by Alameda research and amber group, and the yield will be adjusted according to “market conditions”.

Son Zhengyi believes that the algorithmic stablecoin is not supervised by the government and does not believe that the ban will be good for the industry. “If regulators decide to ban the stablecoin tomorrow, just like China’s ban on cryptocurrency, it will pose a huge risk to the entire cryptocurrency system,” he said. “We must  have a stablecoin that is not controlled by a third party other than cryptocurrency,” he said, referring vaguely to the stablecoin usdc issued by circle.

However, not everyone was convinced. Ryan Watkins, co-founder of Pangea fund management, a cryptocurrency hedge fund, said he thought the ind USTry was over. “I always hope that Terra can turn in time.”