coinfomania.com
Binance CEO Changpeng Zhao (CZ) recently shared his thoughts on the downfall of the Terra ecosystem. While CZ believes there are many lessons to be learned from the cataclysmic event, he highlighted some of the flaws that caused the crash.
Recall that earlier this month, the Terra blockchain crumbled to the ground after its algorithm stablecoin UST lost its peg to the US dollar, which caused LUNA, its governance tokens to crash from nearly $100 to $0.0001 within a few days.
The crash sent shivers through the entire crypto industry as investors were left counting their losses. As reported, both retail investors who invested in LUNA/UST as well as crypto firms that partnered with the Terra blockchain, were affected by the incident as over $40 billion vanished into thin air.
CZ Binance Cites Design Flaws and High APY
As industry experts continue to weigh in on the epic crash, Binance CEO said the architectural design of the Terra network contributed to its failure.
Zhao noted that pegging UST to dollar and using a different asset as collateral was a bad move as there will always be a chance of under collateralization or depegging.
“The most stupid design flaw is thinking that minting more of an asset will increase its total value (market cap). Printing money does not create value; it just dilutes existing holders. Exponentially minting LUNA made the problem a lot worse. Whoever designed this should have their head checked,” he said.
CZ also cited incentives and high APY as part of Terra’s flaws. According to him, while the blockchain had a strong use case, the incentives used to accelerate its growth were unnecessary.
The Binance boss noted that using incentives to attract customers requires generating more income to maintain the ecosystem, which means generating more profits than expenditure. He then described the growth rate of the Terra ecosystem as “hollow,” noting that the speed of its growth superseded the incentives provided.
Too late to Rescue TerraUST
Aside from the design flaws, Zhao noted that the entire menace would have been avoided if the team had started off their recovery journey at the earliest stage of the depegging when the UST value was at 5% instead of 99%.
Recall that when the stablecoin started depegging, LUNA foundation Guard (LFG) deployed $1.5 billion and emptied its $2.2 billion Bitcoin Reserve to restore the peg. Terra CEO Do Kwon also pledged to rebuild the Terra ecosystem with collateral backing. Unfortunately, none of the attempts worked as both UST and LUNA crashed to zero.
CZ further noted that aside from making a quick move to restore the network, the team behind the creation of the ecosystem is also guilty of lack of proper communication.
“The Terra team was also very slow and infrequent in their communication with the community, which further eroded any lingering trust users had with them,” he said.