The crypto market had a very sobering experience in May. Many had entered the month hoping – and even believing – that things could begin on a softer note, but this didn’t quite pan out. Coins eventually eroded all the gains they had made in the past year, with the market essentially losing close to a trillion dollars in market cap.
Weeks following the devastating crash, coins are still struggling to make their way out. Investors have been frustrated by the market’s performance so far, and while many understand that there are still gains to be captured in the long run, the fact that this crash happened will affect credibility for the short term at the very least.
However, this crash also presents an opportunity for token developers and market players to take some lessons. In the past two weeks, we have found that the crash in the market was primarily due to a flaw in the Terra ecosystem. The ecosystem had focused on developing stablecoins, and its major asset – UST – lost its peg against the dollar.
If you’re a token developer, the crash of the Terra ecosystem presents a massive opportunity for you to learn how to build right.
LUNA And UST Cause A Market-Wide Crash
To begin with, it’s worth noting that the crash in the market didn’t happen because of LUNA and the Terra ecosystem alone. However, this failure in the stablecoin ecosystem was a massive contributing factor to what we have right now.
Terra was built to be a system where developers can easily build stablecoins. The platform was developed to offer support for all assets in its ecosystem through its token – a dollar-pegged stablecoin called UST.
UST maintained its dollar peg thanks to its mint/burn link mechanism with Terra’s network token – LUNA.
At its height, UST had become its third most valuable stablecoin, pipping BUSD and holding its palace behind USDT and USDC. However, due to the market drop and other factors, this all came to crash in the middle of May. UST lost its dollar peg, dropping as low as $0.4. The drop in its value caused LUNA’s value to also plummet, with the once major large-cap coin losing 99 percent of its value in less than a day.
Takeaways For Token Holders
With the fallout from the LUNA crash still being felt, it seems safe to say that the crypto market has a months-long climb to endure before assets become profitable again. However, this doesn’t necessarily mean that developers should sit and wait. Projects are still being built, and many even believe that market downturns are the perfect time to develop and build for the future.
If you’re looking to get your crypto and token-based project off the ground, there are several lessons you could learn from this situation.
● Innovation Works, But It Should Be Practical
One of the reasons why Terra failed was that it was a relatively novel innovation that hadn’t been seen before. Stablecoins are no novel thing, but a system that allows these assets to be built hadn’t been seen before.
Terra was able to gain massive popularity because of its algorithmic operation. However, the fact that it had initial success blinded many to the different flaws. With LUNA and UST being linked, it seemed obvious that an issue with the pricing mechanism of one asset would have affected the other. At the same time, the fact that UST was a stablecoin meant that no one really believed it would ever go below its dollar peg.
When the depegging eventually happened, the entire ecosystem fell into ruin.
The lesson here is to vet ideas that you might have concerning what to build. The fact that something is novel and innovative doesn’t necessarily mean it will work. Terra is just the latest in the line of innovations and developments that absolutely fell flat on their faces, and it won’t be the last. However, the important thing is for your project to not be on that list.
● Transparency Remains Key
Another major lesson from this implosion is the fact that being open always helps crypto projects.
When the Terra crash happened, the developers essentially fell silent for the first two days, leaving everyone to wonder whether they had been scammed or if this was sort of a rug pull. Subsequent reports also found that Terraform Labs had mysteriously spent billions of dollars in Bitcoin – which they had been buying up for weeks – in an effort to control the bleeding. Some believe that there could be some shady dealings going on.
As a developer, being open about everything you’re doing will definitely go a long way in building the trust you need. With transparency, you can go a long way in building your reputation and standing – especially among your community members.
● Crises Allow You To Test Your Token’s Value
Finally, developers should also remember to not run from market crises. LUNA had been tipped to be the SOL of 2022. The asset, which was relatively unknown last year, became the 10th most valuable coin by market cap at its peak. And, everything seemed to make sense with it.
However, in the past few months, the market has experienced a bearish movement that has threatened a lot of assets. And, LUNA didn’t necessarily pass this test.
The crisis of this month showed that crisis moments will be the ones to reveal the true worth of a token. If your token can survive these periods, then you should be comfortable considering it for long-term investment. If not, then go back to the drawing board.
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