Binance CEO Changpeng Zhao recently offered his opinions on the Terra ecosystem’s demise. While CZ feels there are several lessons to be drawn from the catastrophic occurrence, he did identify some of the shortcomings that contributed to the accident.
Earlier this month, the Terra blockchain collapsed because its algorithm stablecoin UST lost its peg to the dollar, causing LUNA, its governance tokens, to drop from almost $100 to $0.0001 in a matter of days.
The fall sent tremors across the entire cryptocurrency market, leaving investors to calculate their losses. According to reports, the event harmed both individual investors who invested in LUNA/UST and crypto companies who worked with the Terra blockchain, as over $40 billion vanished into thin air.
As industry experts continue to comment on the dramatic catastrophe, Binance CEO claimed the Terra network’s architectural architecture led to its downfall.
Changpeng Zhao remarked that pegging UST to the dollar and using a different asset as collateral was a terrible idea since there was always the risk of inadequate collateralization or depegging.
The greatest irrational design fault is believing that minting more of an asset would raise its overall worth (market cap). Printing money creates no value; it only dilutes current holders. Exponentially minting LUNA exacerbated the situation. He suggested whoever planned this should get their brain tested.
CZ also mentioned incentives and high APY as weaknesses with Terra. While the blockchain had a solid use case, he believed that the incentives utilized to drive its expansion were superfluous.
The Binance CEO stated that employing incentives to recruit clients necessitates earning more money in order to sustain the ecosystem, which implies creating more profits than spending. He then labeled the Terra ecosystem’s growth rate as hollow, observing that the speed of its expansion outpaced the incentives supplied.
Aside from the design problems, Zhao stated that the entire disaster might have been prevented if the team had begun their recovery trip at the earliest stage of the depegging when the UST value was at 5% rather than 99.5%.
When the stablecoin began depegging, LUNA foundation Guard (LFG) spent $1.5 billion and depleted its $2.2 billion Bitcoin Reserve to restore the peg. Terra CEO Do Kwon has promised collateral support to repair the Terra environment. Unfortunately, none of the attempts were successful, as UST and LUNA both collapsed to zero.
CZ went on to say that, in addition to acting quickly to restore the network, the team behind the ecosystem’s design is also guilty of a lack of effective communication.