Decentralized finance (DeFi), which pertains to the whole of the cryptocurrency ecosystem that bypasses banks, has witnessed a dramatic slump in the wake of the tumultuous downfall of TerraUSD (UST) and its dollar-pegged sister coin Luna over the course of early May. The algorithmic stablecoin, intended to be backed primarily by cryptocurrency Luna (which, like most cryptos sets its price by the market), dropped its peg on May 8, causing widespread panic across the crypto world.
The estimated number now attached to that DeFi exodus has been tallied as a remarkable $83 billion, according to DeFi Llama. Additionally, Staista shows Ethereum’s total locked DeFi market value alone dropped “over $25 billion within a single week.” The DeFi market, which once sat at a high of $195 billion at the beginning of May, now rests at a lowly $112 billion. The collapse of UST sent ripples and shockwaves across the markets as investors sold off their digital assets in ever-rising fears of a crypto collapse.
Of main protocols being hit by the mass exodus were none other than Bitcoin and Ethereum, which dipped well below a respective $30,000 and $2,000, but they certainly weren’t the only ones feeling the heat. The issues lie in the prospects of crypto for investors, specifically stablecoins themselves, as they acted as the perfect digital “bank” to store their money, as such cryptocurrencies were never intended to drop their peg, as did UST.
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In addition to the somewhat unregulated and less costly benefits of pseudo-banking with such digital finances, DeFi, on the whole, was propped up by the process known as staking and the underlying yields afforded by it. Staking entails blockchain procedures being appropriately ordered following the purchase and deposit of said blockchain’s native crypto via investors, allotting the investor yields in return that were quite combative to traditional investment procedures.
Anchor, Terra’s underlying staking platform, proved to be among the most valued DeFi products on the market, as it offered yields up to 20%, and is even correlated to about $40 billion of the entire market value, which should be put into perspective the immense weight wrought by its downfall. This very 20% offering is what led to the inevitable collapse of the algo stablecoin, as explained creator Do Kwon’s former colleague via Financial Times:
“About Won14tn-Won15tn was deposited in just one year after they began to offer the 20 percent yield. Retail investors were lured by the high yield, while venture capital was attracted by the coins’ fast growth. The speed of growth was unsustainable.”
Other similar DeFi projects within the realm, such as Curve and MakerDAO, have experienced similarly weighty dips in estimated value. Considered the largest DeFi project via total value staked, MakerDAO, which was valued at around $17 billion in Feb., now sits at under $10 billion. The aforementioned Curve, a stablecoin swapping platform, went from a high of $24 billion in Jan. to a current $9 billion in value.
— Do Kwon 🌕 (@stablekwon) May 16, 2022
Kwon has a supposed plan, however, to counteract the death of both the stablecoin Terra, as well as Luna. Much akin to what occurred to Ethereum in 2016, Kwon has proposed a so-called “forking” of the terra blockchain, which would see the old version renamed to terra classic, and the new would be supported by a reignited Luna cryptocurrency iteration. Luna coin holders comically called “Lunatics,” are allowed to vote on the Terra network rebirth within the next 18 hours as of writing, with a total of 66% in favor of the fork.
Despite the optics and rebranding, there really would be no saving Terra, and the whole of the DeFi market will never truly be the same again.
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