Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Please consult a financial professional before making any major financial decisions.
What we saw in this week is the collapse of the Tether stable-coin and it looked like a crypto world's "Lehman Brothers moment" to me, reminding me of the crisis that we had in 2008.
There are tons of articles which can help you understand what happened and why it happened so tonight, I would like to put the technical talk aside to focus on the 6 important lessons that i have learned from this epic failure of UST/Luna.
Lesson #1: There is no project that is too big to fail!
Luna failed and this proved again that all cryptocurrencies — independent of their market cap and growth level — are subjected to high levels of risk. Many of us are thinking that Bitcoin, Ethereum, or Solana are too big to fail (I myself build my startup’s core system on Ethereum).
We were wrong.
There is no 100% safe asset out there (yet). Errors in the protocols, hacks, or attacks may cause huge chaos! As a result, even big players can lose the trust of their community in a matter of hours.
Lesson #2: The Fall may happen super-lightning fast!
UST is the algorithmic stable-coin of the Terra ecosystem. This means that its value is algorithmically pegged to the US dollar. There is also a burn-and-mint mechanism between Luna and UST pairs. During the market downtrend, this peg was broken, and the UST value dropped to low values such as $0.4. Since the Luna token’s value is highly correlated to UST, it also lost 90–95% of its value.
This whole thing happened in a matter of hours.
The lesson I’ve learned here is that the market may not give you enough time to close your positions. You have to be super prepared for occasions like this. The best practice is to always define Stop Loss and Take Profit orders, once you enter a position.
This is also the reason why I’ve used automated bots to take care of my crypto portfolio since the bear market in 2020.
Lesson #3: Centralized Exchanges cannot be trusted in crisis.
If you think that you can easily liquidate your crypto assets, once the crisis hits the market, please think twice. Centralized exchanges such as Binance, Crypto.com, or Kraken have several tricks to not let the money go out of their exchanges:
- They suspend withdrawals.
- Their interface will not be responsive.
- They lock assets for certain periods.
On top of all this, when there is chaos in the market, people will freak out. Most of them will try to connect to their accounts and save their funds. Therefore, the web servers might experience downtimes. What happened with UST/Luna situation was that many users recognized that these assets are failing. And they tried to cash out. However, due to the problems I mentioned above, they couldn't.
What can we do about that? There are 2 options:
#1: Find decentralized exchanges that you can use.
#2: The same with Lesson #2, Stop Loss order is your friend.
Lesson #4: VC Funds and Big Investors are your business partners, not your friends.
The Terra foundation also has lots of partnerships with big investors, exchanges, VC funds, and so on and you probably think that a project with those partnerships and financial resources is impossible to fail.
Well, the big money means nothing if the project does not deliver! And after all, the big investors are also monitoring this market accurately. Therefore, if they see that their funds are not safe, they will also exit their positions and Terra is falling as result.
Lesson #5: “Fire proves gold, adversity proves men.”
This crisis proved to us once again that the real value and strength of tokens will be revealed in crisis moments. If a coin/token manages to survive during these times, then it is really something you can consider for long-term investment.
And if not, probably we have to forget it.
Lesson #6: We do need Good regulations.
The UST/Luna crash proved to us (again) that we probably need some regulations on digital assets. This is for ensuring that the investors’ funds are safe, and are subject to minimum risks.
For example, in the case of the UST/Luna pair, a good regulation could be obligatory token/algorithm audits. If UST went through such audits, the possible bugs/errors of the protocol could be revealed at an early stage. Many people think that regulations are scary.They believe that if digital assets are getting regulated, they will lose their value.
No, regulation are not scary.
There are good regulations and bad regulations and of course, we desperately need the good ones for the future of crypto market.