Among the many thousands of failed crypto experiments, Terra Luna stands out as one of the largest, taking with it roughly $60 billion in total market value. “ Deploying more capital - steady lads,” he tweeted.īut ultimately, there wasn’t enough cash coming in to make up for outflow, just as in an ordinary bank run, and this particular experiment in replacing trust with mathematics was at an end. Kwon shoveled more than $1 billion in Bitcoin into the system in an attempt to restore stability. Echoes of the destructive power of derivatives can be heard in the story of the equally exotic Terra Luna.Īs Terra Luna’s death spiral accelerated, its supporters, known as “ Lunatics,” lurched between terror and hope as Mr. But when more and more borrowers defaulted, collateral debt obligations and other exotic derivatives - which Warren Buffett once called “ financial weapons of mass destruction” - collapsed, contributing to the 2008 global financial crisis. In the 2000s, the alchemists of collateralized debt obligations turned junk securities into AAA gold through the mathematical magic of “bundling.” The arcane mathematics underpinning algorithmic stablecoin systems like Terra Luna gave off the same captivatingly mysterious vibe. Like those highflying early internet stocks, these, too, proved vulnerable when trust failed. Terra Luna was an algorithmic stablecoin system in which “stability” was supposedly guaranteed by mathematical mechanisms and incentives. Stablecoins, which serve as a kind of bridge between crypto and ordinary money, have so far required vast amounts of old-fashioned real-world collateral to work, contrary to crypto’s original aim of eliminating reliance on legacy financial systems. His company boasted of reaching an elusive goal in crypto, namely, the establishment of a truly “decentralized” stablecoin. Kwon, now 30, is a notoriously brazen hustler who has made waves for calling his critics “ poor” and “ cockroaches.” But despite his lack of polish, and the early warnings from developers and analysts about the technical weaknesses of his plans, he succeeded in raising $200 million in venture capital from 2018 to 2021. Terraform Labs, the company behind TerraUSD and Luna, was founded in 2018 by Do Kwon, a computer scientist and entrepreneur in South Korea. Despite all the shenanigans going on in the casino, real and lasting companies, publications and communities were built and thrived online. Viewed from the long perspective of market history, this instability isn’t remotely new.īut even as Napster, Webvan and eToys flamed out, a revolution was taking place. The crypto market is wildly volatile not because of cryptocurrency’s underlying technology, but because of the uneasy and often dangerously unstable junction between emerging technologies and regular money. Only a few of the 19,000 cryptocurrencies that have been created since 2009 are now worth billions. Fear spread throughout the exchanges, and with it came panic selling.Īfter the second crash this week, the cryptocurrency market is still worth in total nearly $1 trillion (about one-third of last November’s peak). At its dizzying heights in the spring, it represented roughly 3 percent of the total crypto market. The collapse was largely set off by the death spiral of a cryptocurrency system called Terra Luna, made up of the coin Luna and its associated stablecoin, TerraUSD. The first recent crash, when the cryptocurrency market plunged 36 percent in a week in May, offers a clue. Why has the market fallen apart in such spectacular fashion?
Its skeptics and fans alike must learn to see it as a technological experiment, instead of just a blatant scam or a speculative path to riches. But crypto is just one aspect of the larger blockchain universe. The collapse, not the first of its kind, showed again how the violent swings of a largely unregulated market warp the development of a transformative technology. This week, the crypto market plummeted for the second time in a month, in tandem with a sharp drop in global stock markets.
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