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Binance CEO says the Terra collapse may have been avoided if the reserves was used at 5% depeg


May 20, 2022 · By MATheGooner
Terra (LUNA)

The entire Terra LUNA/UST conundrum could have been avoided, according to Champeng Zhao, CEO of Binance, if Terra had used its reserves while the de-peg was only at 5%.

The multibillion-dollar network Terra’s demise has sparked a wave of dread, anxiety, and doubt across the crypto market, drawing the attention and scrutiny of regulators around the world. 

Champeng Zhao gave his opinions on the incident in a Binance blog post, including lessons learned, spillover effects, systematic risks, resilience, regulations, and more.

The design has several flaws according to CZ, and there is a risk of under collateralization or de-pegging when one item is pegged with another asset as collateral, because nothing in our world is 100 percent stable (relative to something else). 

He also believes that minting more of an asset will increase its total value (market cap), which is a blunder because printing money does not create value; it simply dilutes existing investors. 

The other major problem was the excessively aggressive incentives. Anchor’s fixed APY of 20% designed to encourage (inorganic) growth by generating “income,” which is defined as more revenue than expenses.

The approach is flawed because the definition of “income” is confused, as the project team is likely to have considered its own token sales or appreciation in the value of LUNA as “income.” 

Terra did have an ecosystem with some use cases, according to the 44-year-old computer scientist, and the entire thing was built on a self-perpetuating, shallow concept that eventually led to the bubble burst because the ecosystem’s growth did not match the speed of the incentives used to attract new users. 

CZ further stated that the Terra team was slow in deploying reserves to reestablish the peg, and that the collapse could have been avoided if reserves had been used while the de-peg was at 5%. The team tried to use $3 billion to do the rescue which didn’t work after the value of the coins had already crashed by 99% (or $80 billion).

The Terra team was also very slow and infrequent in their communication with the community, which further eroded any lingering trust users had with them according to CZ. The takeaway here is always be operationally extremely responsive.

CZ says he has mixed feelings about the revival plans provided by the Terra team but regardless of his personal feelings, Binance will support the community’s decision.

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