How Terra collapse nearly killed algorithmic stablecoins

The Terra-Luna Ponzi scheme grew to an incredible size, with the TerraUSD algorithmic stablecoin reaching a mind-boggling $40 billion and the Luna governance token growing to a market capitalization of $40 billion.

This growth was subsidized by Terraform Labs paying an unsustainable lending rate through the Anchor protocol.

Then the music stopped. The value evaporated and the subsequent collapse of Terra-Luna had a devastating effect on the wider crypto ecosystem, destroying trading firms, exchanges, and lending platforms.

However, Terra was far from the sole algorithmic stablecoin, and its spectacular collapse caused a ripple effect that was felt by many of its competitors. Some have pivoted, finding alternative designs with more collateral, but most have failed to see adoption in the industry.

Here we take a look at the current state of some of the better-known projects impacted by Terra’s spectacular demise.

At its peak, TerraUSD’s market cap reached a mind-boggling $40 billion.

Terra

Terra still exists as ‘TerraClassic,’ and it doesn’t look too dissimilar to how it did before the collapse.

This system has maintained much of the design of the original Terra-Luna system but doesn’t have the subsidized yield of Anchor.

This asset, which has completely failed to maintain its peg, currently trades for less than three cents and is no longer, meaningfully speaking, a stablecoin. It has a market cap of approximately $130 million, a tiny fraction of the nearly $20 billion it once commanded.

Luna Classic, the corresponding governance token, has a market cap of approximately $500 million, a tiny fraction of the $40 billion it once commanded, according to data from CoinMarketCap.

USDD

USDD is the TRON native algorithmic stablecoin that was announced before the collapse of Terra-Luna. It was intended to duplicate much of Terra-Luna’s model but with an elevated lending rate of approximately 30%.

USDD was supposed to be integrated into the heart of TRON, analogous to Luna, by November 2022, but this wasn’t achieved by the time Terra failed. This has since been abandoned as one of the project’s goals.

In many senses, USDD has abandoned almost all of the trappings of algorithmic stablecoins and has instead become a stablecoin collateralized by ‘burned’ TRX tokens and a few other assets. A significant amount of its reserves are held at Sun-advised HTX.

Justin Sun stored USDD reserves at HTX for proof-of-reserves

Nominally, there is a Decentralized Autonomous Organization (DAO) that governs this protocol. However, this appears to be fiction, with actual control over this project being much more centralized.

The governance page shows only a single vote; one that allowed burned TRX to be deployed by USDD, making it unclear if the DAO knows what ‘burning is.’

There are no votes for other major decisions, including the massive changes in protocol directions, the decision to hold reserves at HTX, or the substantial changes in the reserve composition for the stablecoin.

In a recent example, the stablecoin removed 12,000 bitcoins from its reserves without a corresponding vote.

The market cap for the coin has been remarkably stable since its launch, holding around $700 million, according to data from CoinMarketCap.

Celo/Mento

Celo is now a level-2 solution on Ethereum; when it launched, it was a layer-1 that closely mimicked the way in which Terra functions with an algorithmic stablecoin exchangeable for a corresponding governance token.

This function has since been spun out into Mento, and instead of deriving value from convertibility into Celo Gold, it maintains value by over-collateralization of the Mento Reserve, including assets like CELO, sDAI, USDC, ETH, and BTC.

The USD-pegged version of these stablecoins has a market capitalization of approximately $26.5 million, down from a peak of almost $120 million, according to data from CoinMarketCap.

Frax

Frax is a dollar-pegged stablecoin that started partially collateralized. However, now on version 3.0, its aim is to be wholly collateralized, principally by cryptocurrencies.

Currently, the collateral for this coin is largely staked and directly held FRAX.

The market capitalization for this token is approximately $640 million, down from a peak of approximately $2.9 billion, according to data from CoinMarketCap.

Conclusion

Many projects that once hoped to emulate Terra’s incredible success have had to pivot as the consequences of its failure reverberated throughout the ecosystem.

Very few of these projects have seen new adoption since Terra’s failure, and more attention seems to be spent on alternative stablecoin designs like Ethena’s eUSD.

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