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Changpeng Zhao (CZ), the CEO of Binance, the largest crypto exchange by trading volume, has come out to share a few crypto lessons after the crash of TerraForm Labs’ LUNA and UST coins.
In a May 20 blog post, CZ said the UST/LUNA incident was a regrettable one that impacted many people. While he asserted that Binance seeks to protect its users he acknowledged that the exchange did not have any great solutions other than the ones proposed in the community, which had their own shortcomings.
He added that Binance volunteered to let TerraForm Labs focus on compensating retail investors first. Nonetheless, he pointed out that Terra’s collapse left the crypto industry with a lot to learn.
Cz said,
“Theoretically speaking, when you peg to one asset using a different asset as collateral, there will always be a chance for under collateralization or depegging. Even if it is over collateralized by 10x, the collateral asset can crash more than 10x. Nothing is 100% stable (relative to something else) in this world.”
He added that the most stupid decision a project can make is thinking that minting more of an asset can increase its total value. CZ explained that the minting of more LUNA only exacerbated the situation, seeing as this solution only diluted the value for existing token holders.
Apart from minting more LUNA, CZ objected to the use of over-aggressive incentives. He highlighted the case of Anchor Protocol, which offered a 20% APY to foster in-organic growth. According to CZ, incentives can attract investors. However, projects need to generate value to sustain their user bases.
CZ further noted that although Terra had an ecosystem with some use cases, the network’s growth did not match the pace of the incentives it used to attract new users. He further noted that Terra’s growth was hollow, and the bubble eventually burst.
Where did TerraForm Labs go wrong in restoring UST’s peg?
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