May 2022 was certainly a month that will be remembered in the history of crypto and DeFi for the implosion of the Terra ecosystem.
On May 10, UST, the Terra stable coin, experienced a 25% de-peg from the US dollar. While this did not come as a big surprise to many market participants (we just discussed UST economics in our April wrap-up), initially it seemed possible that the Luna foundation guard (LFG) would be able to defend UST using its huge BTC reserve. While UST was back to 0.93 USD in the late trading hours of May 10, we all know very well where all of this ended.
However, instead of bemoaning the Terra debacle and debating about this being crypto’s „Lehman event“ as some pundits have framed it, it is worth having an unemotional look at the current situation:
There were no major ripple-down effects outside the Terra ecosystem (yet). No central authority came to rescue parts of the system. In fact, crypto and DeFi markets are facing major macro headwinds, which certainly added to the sharp market decline of recent weeks. When looking at this situation, the conclusion could well be that the crypto / DeFi ecosystem will become more resilient and emerge stronger than before, given the lessons learned and improvements being made to all areas of the market now.
The two largest stable coins, Tether (USDT) and USD Coin (USDC) have survived relatively unscathed. USDT saw considerable outflows, amounting to USD 10.1bn between May 7 and May 25. In other words Tether lost 12.1% of its market cap. USDC on the other hand saw inflows of USD 5bn over the same period, which equals a 10.4% increase in market cap. What does that mean?
- USDC seems to be viewed as the “soundest” stable coin by many investors now.
- Stable coin markets functioned remarkably well during the immediate stress period of the Terra collapse. Even USDT’s short de-peg on May 12 was restored quickly.
While LUNA and UST both effectively crashed to zero, plans for a Terra 2.0 network have been developed. If these plans succeed, LUNA and UST holders might be able to recoup part of their losses, but as of today this is still very speculative.
And if these facts are still not sufficient for the sceptics to change their mood, a look at the announcement made by a16z crypto, the crypto unit of venture capital giant Andreessen Horowitz, on May 25 might help: They are launching “Crypto Fund 4”, at USD 4.5bn the largest dedicated crypto / Web3 / Defi fund ever raised. Proabaly not a bad timing given current valuation levels in the industry, but certaily a bold statement at the end of May 2022.