Binance CEO Changpeng Zhao shared some crypto recommendations following the collapse of TerraForm Labs LUNA and UST Coins resulting in the loss of $40 billion and affecting the whole crypto market.
The crash incident of LUNA/UST is a tragedy that has resulted in financial loss to many people, Changpeng Zhao commented in a blog post on May 20, 2022. CZ emphasized that Binance is always looking to protect clients from losses and conceded that crypto exchanges are limited to a community-proposed solution with numerous flaws.
Binance CEO Speaks About LUNA
He further stated that Binance offered to let TerraForm Labs concentrate on repaying retail investors on a priority basis. First, however, CZ highlighted that crypto space must grasp lessons from the crash of Terra.
Changpeng Zhao stated,
Theoretically speaking, when you peg to one asset using a different asset as collateral, there will always be a chance for under collateralization or de-pegging. Even if it is over collateralized by 10x, the collateral asset can crash more than 10x. Nothing is 100% stable (relative to something else) in this world
“I think the most stupid decision a project can make is thinking that minting more of an asset will increase its total value,” CZ explained. He went on to say that the minting of more LUNA only made the situation worse because this solution diluted the value for existing token holders.
As per Zhao, apart from increased minting implementation, a fierce incentives policy is another cause of the LUNA crash. He also quoted the example of the Anchor Protocol, which promoted in-organic growth by dedicating 20% APY. Although incentives are an easy way to charm customers, the user bases are the main reason for the long-term stability of a project, CZ said.
The Binance CEO argued that while Terra has an ecosystem with some use cases, the network’s growth did not keep up with the rate it offered new users incentives. He referred to the progression of Terra as hollow and ultimately exploded like a bubble.
Terra exhibited a weak stance against de-pegging UST, and the company did not act immediately enough to use its reserves to reinstate the peg. If TerraForm Labs had used its reserves when the de-peg was at 5%, it would have avoided an entire incident, said the Binance CEO.
As per CZ, the Terra team did not adopt a proactive approach to utilize the available $3 billion reserves for recovering UST’s peg, and the stablecoin collapsed by 99%. He concluded the lesson that crypto projects must be receptive to the operations and communicate to their customers every time, particularly during crises.
Featured image from Pixabay and Chart from Tradingview.com