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What Happened to Terra LUNA

The crypto market has already finished grieving about the Terra-LUNA tragedy, but we will come back to this topic to figure out their mistakes. The Reserveum team is working on an algorithmic stablecoin, so it is very important for us to prevent the problems other projects have faced. And for these purposes, the Terra project is a wonderful example of how to NOT build an algorithmic stablecoin.

The Reserveum stablecoin protocol is now under development, and any crypto market event, whether positive or negative, helps us make our product better.

So, what went wrong with Terra?

The Reserveum analysts believe that the technical reason for the collapse was that UST lost its ties to the USD. It is important to note here that the Terra stablecoin was never backed by enough dollars; it was just tied to USD at a 1:1 ratio. It is important because the real financial backup makes your asset more resistant to such price jumps.

UST was designed differently. Its price was supported by the Proof of Stake mechanism and the ecosystem’s additional token – LUNA. The biggest holders could influence the token emission since the passive income of the price growth depended on the number of their purchased tokens. So, the price growth depended only on the number of participants who initiated its emission. Such a pyramid structure of the Terra project is its another weak spot.

The UST tokens were issued when the smart contract received the amount of crypto equivalent to 1 USD. So one could print as many stablecoins as s/he wanted; this is what happened to UST when a big player launched dozens of thousands of Bitcoins worth of token emission. This made the number of UST tokens grow so much it lowered its liquidity.

That huge coin inflow caused the protocol to issue more of the balancing LUNA coins to keep the price at the same level. Trillions of LUNA tokens were printed to support the Terra stablecoin, and the market just could not swallow that big of a chunk. The LUNA token fell down from the top 10 tokens to almost 0 USD per token in a matter of days, if not hours. So, the mechanism that supported UST in the normal conditions made an error under a massive attack and destroyed itself.

What are the conclusions from this story?

A token can be called a stablecoin only when it has a real financial backup which guarantees that a tokenholder can exchange the coin for its reserve currency whenever s/he wants. As we see from the Terra example, it is impossible to circumvent this condition. The market instantly loses trust in a token that is not backed by anything, and a well-planned attack can ruin it.

Any cryptocurrency can be called a financial pyramid since its price only depends on the trust and enthusiasm of the crypto community. This is why the coin that is built on a real business, source or a whole economy will gain a huge boost. Then such a cryptocurrency will become similar to stocks that give the project investment for further development. An investor can take part in future profits, and these profits will depend not on the inflow of new tokenholders but on the commercial activity or the project’s product.

And, eventually, to prevent the decentralisation to lead to uncontrollable coin minting, we need an algorithm that would calculate the right amount of tokens. They should not be inflationary, i.e. harm the economy and its participants.

The protection from inflation is actually the main quality that any stablecoin should support, otherwise, who needs it? We have too much inflationary fiat money already, the money from our bank accounts and cards that we have to spend right away, or it would turn into a pumpkin at midnight.

We prioritise the problem of inflationary money in our research. You can read more on it in our article called “Inflation Export and Marshall Plan”.

How are we going to use this experience to develop effective money?

In fact, the Reserveum developers are already bearing in mind the risks that the Terra project had not noticed. Our stablecoin is going to be backed by more promising and sustainable cryptocurrencies. This is a fairly safe and flexible form of a back-up. On the one hand, our stablecoin will not depend on just one asset; on the other, the crypto market capitalisation will guarantee the support of the full-fledged financial industry.

We have also succeeded in developing an algorithm that can manage both the price and the emission of our token. The Reserveum stablecoin cannot possibly be attacked by speculators due to its technical features, which means it is well protected from inflation and crash. Also, the ecosystem participants can control the emission too, so it can be called a self-regulating crypto environment.

The Reserveum tokenholders are not going to just hold the tokens; they will take an active part in the life and development of the whole system. Apart from influencing the emission, they can form the reserve and manage it. Whenever a part of the reserve is taken by some user, the smart contract will immediately burn the corresponding number of tokens, which means the liquidity crisis is absolutely impossible for the Reserveum coin.

So, even at the development stage, we can be sure that the Reserveum coin will not follow Terra’s footsteps, the algorithm itself guarantees it. But for us, only the sky is the limit, so we continue working and invite all the enthusiasts to join us.

According to the analysis group findings: reserveum.org

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