Earth is crumbling.
The blockchain project, which houses the popular algorithmic stablecoin TerraUSD (UST), which recently became the fourth largest stable currency by market value, but now ranks fifth, is about to collapse as UST does not you can keep your $ 1 peg and LUNA, the native of the blockchain. tab, close to zero.
Terraform Labs, the technology start-up behind Terra’s development, on Thursday halted production of new blocks on the network “to prevent government attacks after severe $ LUNA inflation and a significantly reduced attack cost,” Twitter.
A government attack has become more expensive due to the almost free price of LUNA: an attacker could economically acquire enough LUNA tokens to socially attack the network by forcing a majority vote. (Since Earth depends on a derivation of the participation test (PoS) for consensus instead of hardware and electricity as in the working test (PoW) of Bitcoin, the ownership of the currency is equal to the power. In Bitcoin, the amount of BTC that owns no does not grant you more power in the network).
The network it was live a couple of hours later when the software patch was released.
This is another important difference between a network like Earth and Bitcoin: while in the former a minority of entities that can vote on things like stopping the network, the true decentralization of Bitcoin makes it immune to the whims of any specific group.
How does UST work?
Stable currencies are digital representations of value in the form of tokens that attempt to maintain one-on-one parity with a fiat currency such as the US dollar. Tether (USDT) and USD Coin (USDC) lead the market capitalization ranking and are the most popular and widely used stablecoins. However, they are issued (minted) and destroyed (burned) by centralized entities that also maintain the dollar-equivalent reserves needed to support the currency.
The UST de Terra, on the other hand, sought to become a stable currency whose minting and recording process was carried out using a computer program, an algorithmic process.
Under the hood, Terra “promises” that people can exchange 1 UST for 1 $ of MOON (whose value fluctuates freely according to supply and demand) at any time. If UST breaks its upside fixation, arbitrage can exchange $ 1 LUNA for 1 UST, capitalizing the premium with an instant profit. If the pin is broken down, traders can exchange 1 UST for $ 1 of LUNA as well for an instant profit.
What has Bitcoin got to do with this?
Terra has raised awareness among the Bitcoin community after Terraform Labs founder Do Kwon said earlier this year that the project would acquire up to $ 10 billion in bitcoins for UST reserves.
Purchases would be made and coordinated by the Luna Foundation Guard (LFG), a Singapore-based nonprofit that works to cultivate demand for stable Earth coins and “strengthen the stability of the UST plug and foster the growth of the Earth ecosystem. “.
While corporate treasury allocations to bitcoin have grown in popularity over the past two years following MicroStrategy’s ongoing BTC purchases, the LFG move represented BTC’s first major allocation as a reserve asset for a cryptocurrency project. The news was received with a mixture of enthusiasm and skepticism among the community.
Bitcoin Magazine reported at the time that the algorithmic maneuver used by UST stablecoin to maintain its insertion was of dubious sustainability, and bitcoin purchases did not make UST a stable “bitcoin-backed” currency. Even Terraform Labs acknowledged that “questions remain about the sustainability of stable currency algorithmic pegs.”
Terraform Labs also discussed how there should be sufficient demand for stablecoins Terra in the broader cryptocurrency ecosystem to “absorb the short-term volatility of speculative market cycles” and ensure a better chance of long-term success. This is what the BTC project was looking for: to create demand for UST by giving more confidence in the sustainability of the peg.
How Did Earth Implode?
Given the many open questions about the sustainability of such an algorithmically sustained plug, Earth’s design could not sustain itself in a period of stress.
As UST started to lose their negative position, they put extra pressure on LUNA due to the huge amount of UST trying to get out and exchange more and more.
As UST began to lose ground, traders sought to trade each of their USTs for $ 1 a month. However, given the rapid pace of devaluation, a massive amount of UST tried to get out, more than Earth was able to exchange for LUNA. That extended chain exchange spread to 40% and put extra pressure on LUNA, sending its price south sharply.
Tab downloaded a “spiral of death”.
In a wave effect, LUNA fell, falling close to zero on Thursday. Image source: TradingView.
What does this teach us?
In short, it can be argued that the lesson to be learned from this is: alternative cryptocurrency projects (altcoins) are nothing more than an experiment, while Bitcoin is the only tried and tested peer-to-peer digital money.
Bitcoin was born from the ideals of cypherpunks, a group of early cryptographers with a shared vision who came together to explore what privacy could mean in the then near digital world, especially when it comes to money.
The cypherpunk movement was developed, for the most part, from the work of Dr. David Chaum, a pioneer of cryptography who brought mathematical technology out of the hands of government bureaucrats to enter the realm of public knowledge. His explorations began a whole line of work, devoted to discovering how society could transfer money between peers (cash) to a digitized economy.
With a clear goal in mind, these mathematicians began to work out how a solution could be through research and experimentation. Decades later, Satoshi Nakamoto would put it all together and add his own twist to come to Bitcoin, the first and only decentralized and unreliable form of digital money.
As Bitcoin grew in popularity, alternative forms of what became known as cryptocurrencies began to be created, a currency that exists in the digital realm through the use of cryptography. Although these currencies were initially born to compete with Bitcoin, later a large number of projects with different value propositions began to emerge as they gave their own twist to the blockchain, consensus, and cryptography that made Bitcoin work.
Nakamoto designed the Bitcoin protocol to leverage PoW, a consensus mechanism that relies on computing power and free competition to coin new BTCs in the Bitcoin blockchain. The bitcoin mining career, as it is known, comprises thousands of miners around the world with a single goal: to find the next valid block and receive bitcoins as a reward.
However, altcoins have moved away mainly from PoW to favor other new consensus mechanisms. The most popular alternative, PoS, allows participants to block their native token holdings from the particular project to become blockchain makers instead of letting them compete with mining hardware and electricity to extract new coins.
Although PoW brings real costs to miners, the costs in PoS are merely digital and represent the amount of money spent to buy those coins that are bet. The assumption with PoS is that betting on those coins ensures that miners have skin in the game and is therefore encouraged to behave honestly, but there is no evidence that such a commitment is a sufficient incentive. In addition, in cases where there is a sharp devaluation, as is the case with LUNA, the network runs the risk of being affected by a government attack and may have to take totalitarian action such as stopping mass production of what was supposed to be a network. unstoppable decentralized and without permits.
PoW-PoS dynamics is also important because it highlights the experimental nature of altcoins.
Instead of copying the Bitcoin model, a strategy that has been proven time and time again unsuccessfully, new altcoin projects try to “innovate” by copying some parts of the Bitcoin design and changing others.
As a result, the projects being launched today deviate from most of the ideals that underpin the cypherpunk movement that began decades ago. These projects are called decentralized, but for the most part they have a founding team that almost never leaves their position of control and can direct all decisions that occur on the network.
With so much desire to innovate, most “crypto” projects end up creating artificial problems that do not exist to be able to invent a novel solution.
Dr. Chaum and the cypherpunks have identified a clear problem in society: how will we have money in the digital age that cannot be spent twice without a centralized authority tracking balances? Many specialized scientists and mathematicians from different backgrounds needed decades of research to finally culminate in an elegant solution to this problem.
Today, however, cryptocurrency teams take a couple of years from generating ideas to a minimum viable product, without enjoying organic growth in favor of large amounts of capital that disproportionately favors insiders to the detriment of the regular user.