What Caused Terra’s Collapse

When TerraUSD (UST) lost its stablecoin status by losing its dollar peg, the community thought one big trade caused the collapse. According to research by Nanson, smaller players, including Celsius Network, contributed to the decline.

TerraUSD had two major flaws. First, depositors could withdraw any amount at any time. Second, it paid up to 20% in interest. Users earned the return by lending it on Terra’s Anchor Protocol.

Nansen wrote that UST’s shallow liquidity contributed to its vulnerability. When the de-pegging process unfolded, arbitraging inefficiencies emerged. Nansen believes that the de-peg of UST is the result of several well-funded entities deciding to cut their UST allocations deposited into Anchor.

Celsius withdrew $500 million of funds from the Anchor protocol. Before May 18, Celsius had $11.8 billion in assets. In the last month, the value of CEL fell from over $2.00 to around 55 cents.

The sudden drop in the value of UST, Celsius, and other coins will become a regular occurrence in the months ahead. Investors should consider sticking with the strongest cryptocurrencies. Bitcoin and Ethereum have lower relative volatility.

Ethereum will switch from proof-of-work to proof-of-stake this summer. This conversion project took many years and will bear fruit soon.

UST’s loss is unfortunate for holders. Anyone not holding it should still monitor its developments.