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The LUNA and TerraUSD Crash
I am a professor of cryptography and not of “crypto” —and where the name “crypto” is now more than often linked to cryptocurrency. In fact, recently, the person holding the “crypto.com” domain finally sold it out for a rather large fee but had held out for years because he didn’t want it associated with cryptocurrency. My general interest in cryptocurrencies is focused on the cryptography used and in the algorithms that they use, and how digital trust can be applied to our world. But, I am also interested in the evolution of financial market places, and in the way it challenges our existing approaches.
So, before I outline how the LUNA and TerraUSD (UST) crash, I state that I am not an economics professor, so please forgive me for my understandings of areas of supply and demand, and of financial markets. So get ready to understand the difference between a state-backed tethered token (highly stable) and an algorithmic tethered token (inherently fragile [1]).
Algorithmic tethering
Anyone can create their own token. Basically, they conform with the ERC-20 standard, and are minted through a smart contract. They can then be traded with or without any value. Many companies have thus minted tokens which relate to a given service, and which can be traded in exchanges. One example of this is the LUNA token and which is associated with the…
