The first notable blow came from the Terra Luna crash in May 2022. Terra’s algorithmic decentralised stablecoin was touted to be trustless and, through dynamic trading, to be able to generate higher yield than other alwaysfully-backed stablecoins. In the parlance of cryptocurrencies, “trustless” refers to the decentralised quality of blockchains, where there is no need for users to rely on trust in a third party. Terra came up with a creative market-based mechanism that aimed to maintain stability. However, the white paper implied that users needed to believe in continuous demand for Terra’s token Luna. When demand collapsed, the project promptly failed. Research shows that algorithmic stablecoins can never be jointly stable, efficient and decentralised.
As much as cryptocurrency and decentralised finance (DeFi) markets had giveth, this year they taketh away. Market participants were rudely awakened to the fact that the decentralised utopia envisioned in Satoshi Nakamoto’s 2008 writing on bitcoin was simply an unrealistic dream. Investors walked in, lured by incentives and computer code; they walked out, with displaced trust.
Terra Luna
