Terra's Collapse Rocks Staking Industry
Terra's Collapse Rocks Staking Industry
The biggest failure in the history of cryptocurrency has shaken the industry to its core
TL;DR
The biggest failure in the history of crypto occurred this week with Terra’s UST stablecoin losing its peg and LUNA imploding completely
There are only a couple of other events in the history of crypto that even come close to the magnitude of this failure
Diversification across all classes is necessary to mitigate risk and for survival
Users should brace for a likely bear market in crypto as the unwinding unfolds, a not entirely unwelcome scenario for DCA pro’s and long-term hodlers
Crypto has recovered from similar events in the past, and it’s important to keep fighting despite discouraging conditions
A plan to regulate the industry around crypto stable US dollar coins will likely be announced soon; going forward the industry will evolve and become more resilient
It’s important to reflect on blessings in life and see crypto for what it is - an opportunity to participate in game-changing technology
What happened with LUNA and UST??
At the start of the week, on Monday May 9th, 2022, there were probably at max, a handful of people who thought that one of the most popular crypto projects that was worth billions of dollars would come to find itself worthless by Friday May 13th. Let me be clear we started the week with UST trading at $1 and LUNA trading at around $62 per LUNA. UST is now trading around $0.15 each and LUNA is for all practical purposes worthless and will likely soon be untradeable. Many, many people were rekt because of the attack on LUNA and we feel deeply for them. The rest of us in the space have not been unscathed either, having suffered large losses due to the liquidity drain the LUNA collapse has had on Osmosis, and due to Osmosis and Cosmos having a strong partnership with Terra.
The thought that a “stable”coin worth billions and billions of dollars, that hundreds of thousands if not over a million of people relied on, could lose more than single digit percent - not to mention LUNA which started at a few cents, rose to $100+ per coin, and spectacularly fell back from where it came, would be unfathomable. You would not have been able to compute that thought. But that’s exactly what happened in less than a business week. What the %#@#! But hey, that’s crypto for better or worse. And it highlights the importance of diversification across all classes: types of investments, correlated investments, amount of investment, and time. Crypto does live up to its status as a risky investment class, no doubt, and our sympathies go out to the Osmosis community which was blindsided through no fault of their own.*
This event rounds out the Top 3 worst things to ever happen in crypto:
Terra Collapse of LUNA & UST
Mt. Gox Collapse
Ethereum DAO Hack
There are many theories on what caused the collapse from loss of confidence, bad governance design, and protocol attack. It’s our belief that a loss of this magnitude in this timeframe could only be the result of an on-chain attack, possibly as detailed on Twitter here. The handling of the situation by the team was not viewed favorably, and looking back into the behavior of key team members on Twitter foreshadowed this outcome. This is “ugly times ugly” and there’s no other way to spin it. The industry will be forced to evolve and each project to fight for its very survival. Many won’t.
For a further summary of the events, check out the following update from DappRadar and an opinion piece, or just open literally any crypto news site.
*Osmosis benefitted greatly from the partnership with Terra as IBC bridges enabled the transfer of LUNA liquidity to the Osmosis platform leading to rise in OSMO, as well as supplied it with its only US Dollar denominated stablecoin at the time. What we’re seeing now is the opposite effect, a liquidity drain as the result of LUNA/UST collapse. I am confident in the Osmosis team that is working very hard behind-the-scenes to iterate on the platform.
Diversification
While countless volumes have been dedicated to the concept of Diversification as well as detailed mathematical principles and formulas for optimization, we will briefly highlight some key concepts here.
Diversification of financial assets can protect your from total loss
Diversification can be achieved through several “classes”
Type of asset - for example crypto as a whole, stocks, real estate, etc.
Specific sub-assets - such as Cosmos network tokens, Ethereum-based tokens, Bitcoin, Cardano, etc. While all crypto is correlated, selecting for tokens on different networks can mitigate against any one specific protocol or blockchain.
Amount of assets - Diversifying well across #1 and #2 above implies that you do not have a disproportionate amount in one coin or protocol and practically nothing in the rest, even though their quantity is high (E.g. 95% of money in LUNA and 5% in 19 other crypto blockchains). So it is important to spread the value around and not consolidate in one thing.
Time - Diversification by time means that you do not place all of your funds in an investment at a single point in time. In so doing you open yourself up to the risk of poor timing. Dollar Cost Averaging (DCA) is an exercise in diversification by time and steady, consistent contributions.
If it wasn’t clear before, for most people, crypto should only make up a fraction of their total assets. And in fact this may be optimal as a total loss of a relatively small fraction will not jeopardize the whole, but can have outsize effect on overall portfolio value thanks to crypto’s ability to generate big returns.
The Road Ahead
For those that invested in the prior week’s Stake of the Week, we apologize for the bad call. The stake, designed to preserve wealth due to its perceived stable nature, was anything but. Having observed this stability for the better part of a year, the thought of a depegging occurring was unfathomable at the time, but no longer. We’re suspending the stake of the week this week in light of this.
This collapse could mark the start of a bear market (either short or long). Positions are still unwinding and the full reverberation has likely not played out. For those with long-term investment horizons, this may bring some golden opportunities as continued contributions now buy much more crypto than in the recent past. The industry will evolve and cryptos that stand the test of time will rise to the top.
We are in the business of educating and informing customers on matters related to cryptocurrency and traditional finance. For anyone who has lost a large amount because of the collapse of LUNA and UST, please feel free to reach out to us, our door is always open.
It seems discouraging right now, but it is through the toughest of times that forge us that we emerge wiser, more experienced, and more resilient. Collectively, we’ll make it through the other side of this; there are and will be plenty of opportunities in crypto. It’s important to keep fighting, as some of the best gains come after some of the worst losses. The asset class is here to stay, and our efforts to understand it will pay off.
In times like these, it’s important to reflect on our blessings in life and what we’re truly thankful for. In seeing the big picture, we appreciate the opportunity to partake in this new, exciting, challenging and disruptive technology that is crypto. The industry will ultimately emerge more resilient, and us wiser.
Stay nimble,
Mike, ACS Founder