Applied Blockchain, a blockchain solution provider in the UK, predicted in January that the Terra Smart Agreement Protocol would run out of funds within nine months. “In reality the fall has been rapid,” CEO Adi Ben-Ari wrote in a LinkedIn post.
The company was approached by an unnamed fund earlier this year to investigate and produce a report on the insurance products available to mitigate those risks, as well as the risks associated with the Terra ecosystem, the LinkedIn Post said.
On May 11, the Terra ecosystem crashed, with its 1: 1 ratio of Terra USD (UST) stablecoin ‘dipping’ falling from USD to $ 0.1, and its Luna Token falling to 000 0.0001945 by May 18, from $ 87.09 in two weeks. Decreased. Before
The crash has been dubbed the Crypto 2008 Moment – a reference to the 2008 financial collapse.
Following the crash, the Applied Blockchain received permission from the fund to publish the results of the study.
Blockchain Protocol, Luna Token and Arn DAP
Terra Blockchain is based on an open-source blockchain, Ben-Ari told Maniweb in an interview. Terra has set up the blockchain itself and has established the Terra brand in it.
Blockchains are leaning towards technological implementations called protocols which are basically a combination of smart agreements that have rules on how those blockchains will work.
The Terra Blockchain consists of a number of protocols or smart contracts, one of which is the Anchor Protocol. According to its website, Anchor Protocol is a lending and borrowing protocol that provides “a stable high interest rate of up to 19.5%”.
Terra is a deployment of both Algorithmic Stablecoin In its blockchain, there is a cryptocurrency token called Terra USD (UST), and Terra Luna (Luna).
The company has also launched a number of applications, the most interesting of which was Arn, a decentralized application or what is known as a dApp.
Through Arn, Terra offered investors an annual return of up to 20%, Ben-Ari said. To use Earn, you need UST, and it all runs on the Anchor protocol.
But UST was not supported by USD. This was supported by Luna, and what keeps the USD ‘pegged’ to the USD was an algorithm, not the actual dollar in a bank.
Lunar prices rose to 11 116.41 in April 2022, up from just $ 4.10 in May 2021, as crypto enthusiasts entered the Terra Arn app in the lure of a 20% year-over-year prospect.
A Algorithmic Stablecoin A stable coin that is ‘pegged’ into a physical asset AlgorithmicallyThis means there is no physical reserve of resources.
To keep the price of UST tied to the US dollar, the algorithms worked in the background to buy and sell enough Luna to ensure that there is enough stock to peg UST value with USD.
The fall of the lunar dragged Bitcoin (BTC) along with it, although subsequent support seems to have found around $ 30,000. Luna has all but disappeared, though there is a quick trade-off between speculators hoping for a comeback.
It is clear that the Applied Blockchain has saved at least one large investor from pouring funds into a terrible stablecoin.
While visiting Terra, Ben-Ari’s team asked themselves a key question: Where did the 20% return come from?
The Anchor Protocol used something called ‘Yield Reserve’ which was designed to hold additional funds which could fill the deficit. When the ‘anchor rate’ does not match the interest rate charge, this reserve will complement the annual percentage yield (APY) of the lending.
“We have come to the conclusion that most of the 20% is coming from Terra’s own reserves,” Ben-Ari told Maniweb. “We felt it was not sustainable over time and recommended that the funds not be invested in Terra.”
The study found that yield reserves were “steadily declining” and that it would “fall to zero in the next few weeks without intervention”.
At the time, it was revealed that Terraform Labs, the company behind Terra Lunar, was planning to inject $ 100-300 million into the crop reserve to strengthen it.
Presciently, the survey reports: “APY will be forced to drop without intervention and if it falls short enough, it could lead to substantial fundraising from Earn. This will either bring the debt rate closer to the debt rate and stabilize the system, or, if sufficient liquidity is withdrawn, it could start a race on the anchor and lead to USP depreciation. ”
Reserve and yield new cryptocurrencies
Ben-Ari explained that there was nothing particularly wrong with Terra’s approach to giving returns from reserves.
Giving an initial return from a reserve is not uncommon in the cryptosphere and is often used to generate interest in a new cryptocurrency unless that cryptocurrency can support itself.
For example, a company issues 20% of a new cryptocurrency, then reserves 80% to give new investors a return. It attracts new investors, increases the value of the cryptocurrency, further increases the reserves where, in theory, sustainable returns are generated.
The growing interest in the Terra blockchain led to the creation of dApps – an application designed to generate yields for many investors – and it should have attracted sufficient funding to sustain the lunar price growth where TerraUSD would be able. To hold the value of 1.
There were other measures to increase the value of the lunar over time, Ben-Ari’s team found.
So there seems to be a plan to bring that 20% return on new earnings – finally. “But it has grown very fast,” Ben-Ari said.
But it turns out that a 20% APY was too good to be true. A lot of people got involved very quickly, and it all broke down, as the Applied Blockchain had predicted in its report.
* Paolo Delgado is a crypto writer who keeps an eye on the bizarre and humane stories behind the ever-fascinating jumps and stumbles of this new wealth class.