This is the next step for Terra as the failed crypto project tries a new path – Reuters News in France and abroad

This week, supporters of failed cryptocurrency project Terra voted to revive the initiative, with a new blockchain and luna token — and without its controversial algorithmic stablecoin, TerraUSD.

The founders were looking for the next step for the project which crashed as quickly as it took off. The collapse of the Terra project resulted in combined losses of around $60 billion between the stablecoin, also known as UST, and its sister cryptocurrency luna. Earlier this month, the UST dropped below its $1 peg, prompting a cryptocurrency selloff.

Like many stablecoins, the UST was pegged at a 1:1 ratio to the dollar. Hitting a new UST required “burning” or destroying a luna. This structure allowed for arbitrage opportunities that were key to maintaining the peg: users could always trade a luna for UST and vice versa at a guaranteed price of $1, regardless of the market price of either other tokens at the time.

“What the Luna ecosystem did is they had a very aggressive and bullish monetary policy that worked pretty much when the markets were doing great, but they had a very weak monetary policy when we ran into bear markets. said Stuti Pandey, a Web3 investor. and Venture Capital Partner at Farmer Fund.

Tether previously claimed that its stablecoin was backed 1 to 1 by the US dollar.

Justin Tallis | AFP | Getty Images

This is not the first time that a decentralized algorithmic stablecoin has failed. Many in crypto had hoped that the Terra project would succeed. But it may be a long time before investors recover from this month’s Terra fiasco – and that could put the new project on shaky ground.

“There is a big question mark. For this to succeed, it will take a lot of rebuilding trust with investors and builders,” Felix Hartmann, managing partner of Hartmann Capital, told CNBC.

“It will also take a lot of hard work from the founders of Luna because they won’t have the billion-dollar market caps they had before: they’ll probably start over on the ground floor,” he said. -he adds. “So it’s something worth watching, but maybe the real realization – if it ever happens – would be in a year or two. Certainly not this month. »

Regulatory hurdles are also looming. Stablecoins have been a priority for regulators for the exact same reasons highlighted by the TerraUSD crash: the lack of transparency in the trading of stablecoins and the reserves that support them, as well as market participants’ reliance on them. to allow trading in other cryptographic protocols. .

“Algorithmic stablecoins as an idea are dead,” said Omid Malekan, crypto industry veteran and adjunct professor at Columbia Business School.

“There are others that are not as big as the UST and they are all in a state of inability to hold the anchor right now,” he added. “This failure has kind of made the other more conservative stablecoins – those backed by fiat – look very attractive in comparison. But the open question now is also what kind of regulatory response the whole industry is getting. »

CNBC’s Ryan Browne contributed to this story.

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This is the next step for Terra as the failed crypto project tries a new path – Reuters News in France and abroad

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