DeFi Evangelists Still Rising

After the collapse of Terra, supporters of DeFi believe that the future of DeFi depends on the existence of stablecoins.

There will be an algo barn in the next five to seven years,” said Hassan Bassiri, a supporter of Terra.

Algorithmic stablecoins are a subset of stablecoins or special digital assets pegged to some fiat currencies. Fixed coin issuers often have funds to peg their stablecoins to fiat, which can satisfy large-scale withdrawals from holders who want to cash out their coins.

Algorithmic stablecoins, on the other hand, rely on a mix of smart contracts and computer code to hold their stablecoins in fiat currency.

Tarun Chitra, CEO of Gauntlet, says:

If you really want to do these things, you have to have this really sharp technical flair and also this crazy awesome look in your eyes.

Transactional volume key to DeFi and Terra’s collapse

Terraform Labs relied on deposits on the Anchor protocol, a type of crypto bank, to maintain the balance between Terra and Luna.

Terraform Labs offers 20% annual returns on its stake Terra tokens, encouraging investors to invest in UST with funds made possible by incentive controls in the wake of the COVID-19 pandemic.

High yields depend on large deposits. However, as stimulus money dried up as central banks halted stimulus plans, investment in decentralized projects, including the IHR, began to decline, eliminating a critical pillar of decentralized finance.

The first red flag for UST came when someone exchanged UST for USDC, Tether and Dai using the DeFi protocol Curve.

When UST drops below its $1 fixed price, traders can “burn” 1 UST by purchasing a $1 sister token called Luna, effectively increasing the scarcity of UST, pushing its price back to $1. When the value of UST exceeds $1, Luna tokens can be burned to create 1 UST, increasing the circulation of the UST and lowering its price.

When UST owners started flashing their USTs for the decadent Luna, more Lunas were needed to make up for the $1. The algorithm created more Lunas, but this drove the Luna’s price down further and required more Lunas to generate $1.

The persistent algorithm caused the UST to drop to $0.20 on May 11.

The “Sun” will shine again

Tron founder Justin Sun continued to defend Terra.

He described a similar case of an algorithmic arbitrage mechanism with Terra to get Tron pegged to the US dollar. The stabilization of the stablecoin will be supported by funding from Alameda Research and Amber Group, with returns adjusted to “market conditions”.

Sun relies on algorithmic stablecoins free from government oversight. Also Sun:

If tomorrow regulators decide to ban stablecoins, like when China announced a ban on crypto, it would pose huge risks to the entire crypto system,” he said. In an implicit reference to the stablecoin USDC published by Circle, “We must have stablecoins that are not controlled by a third party other than crypto.

There are different opinions. Ryan Watkins:

“I was holding out hope that Terra could return in time.”

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About Hama Amefiz

Amefiz is a professional blockchain, cryptocurrency and tech journalist, regular contributor to newsbsc.com who is writing analysis about the latest developments in the cryptocurrency and blockchain space.

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