Terra crash leaves numerous investors with a total loss – that’s what ETH co-founder Buterin says

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Forex in this article

TerraUSD crashes and rides LUNA with it
Numerous investors lose their money completely
Buterin wants to see small investors compensated

The entire crypto community has recently been in a state of great excitement. The reason for this was the drastic slump in the algorithmic stablecoin Terra UST, which tore the associated cyber currency LUNA into the abyss and made it virtually worthless within a very short time. What happened?

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Terra is a stablecoin that should always be in par with the US dollar in order to keep the volatility that prevails with other cryptocurrencies such as Bitcoin within narrow limits. With other stablecoins, this parity is achieved via physical financial reserves, as is the case with the more well-known stablecoin Tether.

However, when designing their cyber motto, the Terra founders opted for a different model, namely an algorithmic stablecoin. This only works in conjunction with a second cryptocurrency created specifically for this purpose: LUNA. When value is created in UST, the same amount is destroyed in LUNA and vice versa. In this way, the dollar price, which is determined by supply and demand, can be traced.

That happened

However, if there is a sharp drop in UST, for example because the US dollar falls drastically, this must be intercepted immediately by the LUNA tokens, so numerous new LUNA tokens are created within a very short time, which in turn dilutes their value leads. This is what happened in the course of the Terra crash, which began to emerge on May 9th and continued to worsen in the days that followed. There was no specific trigger, due to an extremely negative mood on the financial markets, the crypto market also went down significantly, which threw the TerraUSD off track. The LUNA token is now virtually worthless, the Terra blockchain has been officially idle since May 12 and has been decoupled from the US dollar.

The magnitude of this crash is best illustrated by the fact that one LUNA coin was able to mark an all-time high of $119.18 on April 5, 2022, about a month before the crash. Many investors are now left with nothing. Accordingly, there is extensive discussion within the crypto community about how the cryptocurrency should go from now on, but also about whether investors will be compensated for their losses.

That’s what Vitalik Buterin thinks

Ethereum co-founder Vitalik Buterin also commented on this in the course of a Twitter exchange. Following a Twitter user’s suggestion that small investors in particular should be compensated for their losses, Buterin signaled his support. As user PersianCapital wrote, “If Terra only focused on the poorest 99.6 percent of wallets, it could make this gargantuan group 100 percent whole.”

Buterin’s response: “Strong support for it. Coordinated sympathy and help for the average UST retail investor who’s been told silly stuff like ’20 percent interest on the US dollar’ by an influencer, personal responsibility and SFYL for the rich.”

The abbreviation “SFYL” stands for “sorry for your loss”, i.e. “I’m sorry for your loss”, which in relation to wealthy investors means that they can better cope with the losses they have suffered. In addition, Buterin added in another tweet that such compensation would be possible through a deposit insurance scheme, as is common with banks, if it existed. So this could be seen as the Ethereum co-founder’s call for more regulation in the crypto market.

In addition, the crypto expert referred in his tweet to an “interesting” law that exists for employees in Singapore: “Stronger regulation for low earners and more personal responsibility for the rich. In my opinion, these are good hybrid formulas”.

It remains to be seen how exactly the Terra stablecoin will find its way back to par and whether (small) investors will see some of their invested money back.

Editorial office finanzen.net

Image sources: Wit Olszewski / Shutterstock.com

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