Stablecoins are cryptocurrencies that have their value pegged against some external currency or commodity. Their main use is to offer a “safe” place to hold cryptocurrency, without the volatility, and to allow easy transactions for other coins through exchanges. However, the collapse of stablecoin TerraUSD (UST) backed by Luna (a cryptocurrency), proved that nothing is truly stable in the world of cryptocurrency.

Different stablecoins have different methods to prove their worth to ensure they are fully backed. The largest is Tether, which is pegged to the US dollar and backed by cash reserves or cash-equivalent assets (at least that’s what they say). While UST is backed by an algorithm instead in association with Luna.

Blockchain allows the use of smart contracts which contain code that can automatically change the supply and demand of UST. UST was built and linked with Luna, where 1 UST was equivalent to $1 worth of Luna, so that someone holding 1 UST could always get $1 in value back. For example, when the value of UST is greater than $1, it encourages people to trade $1 worth of Luna for one UST, driving up the supply of UST and its price down. When one UST is worth less than $1, the opposite is true - it encourages people to trade it in for $1 of Luna, driving the circulation of UST down.

Simple supply and demand right? What could go wrong?

Those in the crypto space will be familiar with various projects and funds who promise insane interest rates upon staking (locking) up your cryptocurrency. UST used a project called “Anchor” which promised interest rates up to 20% for UST deposits. This attracted investors to deposit UST in a cryptocurrency equivalent of a bank, and led to Luna’s rapid rise to over $100 per coin.

As Luna and UST grew, Do Kwon (the founder of Luna) bought Bitcoin and Avalanche to add to a reserve to meet the demand of UST and provide a more traditional sense of backing. However, the attraction of UST was the high interest rates and that was only sustained if more and more people kept buying into the ecosystem; like your typical Ponzi schemes.

On May the 2nd 2022, the Anchor protocol dropped its interest rates and a few days later a substantial amount of UST was withdrawn and exchanged for another stable coin (for unknown reasons). The drop in interest rates and withdrawals had a domino effect as more people withdrew from Anchor. As UST began to lose its peg, Luna couldn’t help re-peg it due to loss of investor’s confidence and an overall bearish sentiment across the financial markets. To add icing to the cake as more UST was withdrawn, more Luna supply was added, catalysing its demise. Now fast forward to the present, Luna and UST are now practically worthless. Luna went from a peak of $100 per coin to being worthless in the space of a couple of days, destroying people’s investments.

The markets this year have been constantly up against high inflation and aggressive Federal Reserve interest rate hikes. This has led to persistent selling pressure in the cryptocurrency market due to its high risk nature. Cryptocurrency isn’t widely accepted yet and Luna’s collapse undermined the legitimacy of the market and reduced investor’s confidence. Luna’s collapse ultimately dragged the prices of all other cryptocurrencies down. Luna 5 / Opinions definitely is not the first nor will it be the last Ponzi in the cryptocurrency space and its collapse brings eyes to other crypto platforms which offered similar yearly returns to Anchor.

Celsius is a decentralised finance crypto project where they let investors deposit crypto like a bank and offer you a return. They promised 17% annual percentage yields (APY) and you can probably tell where this is heading.

First of all, how do these lending platforms offer an insane return?

They say they lend to institutional investors at a higher interest rate but due to the nature of decentralised finance it is unverifiable. However, it is believed that firms like Celsius use customer funds for their own margin/leverage trades. The nature of decentralisation brings out ambiguity. Cryptocurrency's rise in dominance came when people heard about 100% returns in days and so leverage trading in that environment was “free money”. However any margin/leveraged trades means there will be a liquidation price as you are borrowing money against your own capital in attempts to make more, and if the liquidation price hits, you are forced to sell to pay back your loans.

The risk of margin trading was hardly remembered during a bull market, but with the market we are in now plus the Luna situation, Celsius eventually met its demise. As prices plummeted, these liquidation prices were chased down by “whales” (very rich individuals). Celsius was going down a spiral of death and so were forced to repay their loans first by locking withdrawals of their customers’ accounts. Therefore, people who deposited crypto in Celsius lost all their money and Celsius became bankrupt as a result.

Celsius wasn’t the only company that went bankrupt as others did too while more are rumoured to be secretly insolvent. The cryptocurrency space is like the Wild West; the lack of regulation, greed and money available is perfect breeding grounds for Ponzis. Who’s to blame though: the Ponzi, or those willing to believe you can get 20% a year doing nothing?

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