There are many moving parts that make the financial world work, and the biggest difference between traditional finance and decentralised finance is that you see a lot more of the latter’s inner workings due to the open nature of the blockchain.
This can be both a blessing and a curse, because whilst a huge advantage of DeFi is that it is not tied to opaque institutions, seeing the cogs and gears in motion can be somewhat intimidating, especially for people who just want to get into crypto and do not want to engage with the technology side of it.
This is what a crypto card is for; it is an easy on-ramp to the world of crypto, whether you simply want to spend it on NFTs or tokens as part of a game, speculate on various cryptocurrency tokens or make payments using crypto rather than your local fiat currency in order to avoid potentially prohibitive conversion fees.
One tool that helps with the latter is the stablecoin, which is such a vital tool within the DeFi network that a consortium of financial technology companies, including several big names in the world of crypto, have joined together to create one.
The idea behind them is to reduce a lot of the volatility that comes with token use, as it allows people to quickly convert their tokens into a currency with a fixed value pegged to a fiat currency, usually the United States Dollar.
The two biggest at present in terms of market capitalisation are Tether and USDC, but at one point there was a third coin that was nearly as big both of them, only to become a cautionary tale and a catalyst that revealed some serious problems with certain companies in DeFi.
The Earth And The Moon
Whilst not the first stablecoin, Terra was one of the first to develop a blockchain protocol designed around stablecoins and their place in DeFi. It used a proof-of-stake consensus model rather than the proof-of-work systems used by Bitcoin and (at the time) Ethereum.
There was a group of stablecoins on Terra, named after the currencies that their value was pegged to, alongside an additional anchoring and governance token known as LUNA.
Unlike other stablecoins, which much like digital gold are backed by actual assets, LUNA was the primary asset that backed TerraUSD and other stablecoins that were part of the Terra group.
The idea was that, much like how the moon controls and manages the tides on Earth, LUNA would absorb volatility, being minted and burned at a rate that helped to maintain their value at all costs. It was also backed by $2.4b worth of Bitcoin, as well as reserves in various other tokens.
The idea was that the value of LUNA and its liquidity pool would be used to prop up Terra, and for a time it worked, reaching an all-time high of $119.51 per token, making it one of the top ten most valuable cryptocurrency tokens available at the time.
The relationship is more complex than this, but the idea was that it would be worth no less than $0.99 and no more than $1.01, with buyers or sellers entering the market to put the value back to normal.
Alongside this, Terra was designed to be a complete DeFi ecosystem, much like Ethereum is, with financial derivatives and even a lending and borrowing protocol.
At the start of 2022, everything seemed to be going brilliantly, with Terra even entering a sponsorship with the 2019 World Series Champion Major League Baseball team Washington Nationals, similar to deals seen in Formula One and the National Basketball Association.
However, on 9th May 2022, the peg broke. TerraUSD (UST) was valued at 98 cents for far longer than it should have been, which became a warning sign that the whole apparatus was about to crash.
LUNA fell to a valuation of under a cent, and UST eventually stabilised at around 15 cents, which basically made it worthless as a stablecoin. This led to a reset of the Terra blockchain, but they never managed to get the $1 peg back.
The reasons for this were multifaceted and complex; the NFT market started to crash, which had a knock-on effect on confidence in cryptocurrencies and the price of Bitcoin, as well as mass withdrawals from the Anchor Protocol, which would affect the value and supply of Luna.
This not only led to founder Do Kwan’s arrest but also a massive knock-on effect to many other companies in crypto, including Celsius, BlockFi, Coinbase and, most notably, FTX.
It also led to the collapse of Signature Bank in early 2023, but the market has since recovered and learned from this particularly difficult time.