The second Luna-Terra situation can also occur again.
It took only 6 days for the popular cryptocurrency Luna, which was traded for 100,000 won on the domestic exchange, to become a piece of trash without a one won. Luna once received worldwide attention, ranking 6th among all cryptocurrencies with a market cap 50 trillion won. Despite the recent stagnant market situation, the shock wave of this situation is even greater, as it attracted the highest price in early April and attracted ‘Lunatic (Luna Investor)’. Considering the fall of the value fixed stable coin that pairs with Luna, the investment in this incident is expected to be an astronomical level.
Although various analysis is being made over the cause of the Luna crisis, it is pointed out that even though Luna-Terra is a high financial engineering product, there is not enough investor safety device. Cryptocurrency -based financial instruments are developing higher yields and developing into a complex and high risk structure, and investors have to identify themselves even themselves without any safety devices. It’s complicated and difficult, so don’t ask for the profit in front of you. This is why there is a potential risk that the second and third Luna crisis will explode at any time.
■ Luna-Terra operation How to look carefully ‘design defects’
Luna-Terra’s operation is simple at first glance and seems to work without problems.
One terra is a stable coin that always needs $ 1 value, and maintains the price by adjusting the quantity through exchange with Luna of $ 1.
For example, suppose the USST has a low demand, so the price has dropped to $ 0.9. Since 1UST changes with Luna of $ 1 worth, the arbitrator can buy 1UST for $ 0.9 for $ 0.9 and change it to Luna of $ 1. Expecting profits and buying USST, the price is near $ 1. At this time, the system issues Luna to provide Luna, and USST is incinerated.
The same is true for the opposite case. If the USST demand is high, if you go up to $ 1.1, you will be able to realize $ 0.1 if you buy a $ 1 worth of Luna and exchange it with a $ 1.1 value of $ 1.1. At this time, the system issues terra and Luna incinerates.
Terra seems to have a mechanism that can always return to $ 1, even if the price rises or falls. However, if you look deeply, you can see that this principle may not work properly.
First of all, when USST demand is rapidly reduced at once, it has a structural defect that can fall into a ‘whirlpool of death’ when pegging ($ 1 fixed) is greatly broken. In other words, if a sudden mass selling occurs, Luna is issued indefinitely, and Luna’s prices will no longer play a role as a collateral of Terra, and as a result, the price of terra prices will result.
If the demand for UST is significantly reduced, pegging can be broken, and the demand for UST is absolutely dependent on the anchor protocol. In the meantime, the Terra Ecosystem has maintained demand for UST by using anchor protocols that pay 20%of interest annually by depositing USST. More than 70% of USST supply was deposited in the anchor protocol.
In fact, the unpresttable crash caused these two factors to work at the same time. As the interest and payment capacity of the anchor protocol reached its limit, the USST’s support base weakened, and when a sudden mass selling was unknown, Luna-Terra Coin led to the worst situation in which it fell into a “whirlwind of death.”
■ Design defects hidden behind complex operation… Luna-Teraman’s problem?
In the cryptocurrency industry, there are many more complicated cryptocurrency -based financial products that are “relatively simple” in the way Terra and Luna’s operation.
There are 20,000 cryptocurrencies on the market. Unlike initial cryptocurrencies, such as Bitcoin and Ethereum, in recent years, there are a lot of complex cryptocurrencies that are difficult for general investors to understand in recent years.
This trend is prominent in the decentralized finance (Defi) field, which recruits users with high returns.
Definity finance is a service that provides financial products such as deposits and loans using cryptocurrency without a centralized bank. If the stable coin, which is fixed (pegging) for $ 1, is deposited on the Defi product, it is popular because it can earn high profits in the fall. It’s as if Luna-Terra, an algorithm-based stable nose that was problematic, attracted investors in combination with anchor protocol, an anchor protocol in the ecosystem.
As many coins are connected and dependent on each other, complexity is higher, and general investors are becoming more difficult to grasp the risks inherent in the product.
■ There must be a proper regulatory frame for cryptocurrency -based financial instruments
So far, there is no institutional device that can prevent the second Luna-Terra crisis. Since cryptocurrency -based financial products are outside the border, there is no way to sanction a product design that can cause investor damage.
Kim Hyung -joong, a professor of information security at Korea University, said, “There is no way to regulate because it is not recognized as a financial product as a financial product.” The product would not have been released from the beginning. ”
In the case of Luna-Terra, the operating structure is too dependent on the anchor protocol that pays 20%interest, and this high level of interest payment cannot be continued, so the demand for Terra (USST) can be reduced and vulnerable to strong selling tax. If it was reviewed before the launch, it would not have led to this serious problem.
There is also a voice that the Yun Seok -yeol government should classify the types of cryptocurrency assets in detail and introduce appropriate regulatory frames according to the nature of the asset. The new government is known to have established the Basic Digital Asset Act, which includes cryptocurrency into the system, and plans to implement it from 2024.
Professor Kim emphasized that “the Basic Digital Asset Act requires definition of nature by cryptocurrency type and apply appropriate rules such as the Capital Markets Act and the online Investment Finance Act (On -to -to -Law) according to the nature of the assets.”