Photo by olieman.eth on Unsplash 

The crash of Terra Lunas’s UST stablecoin has heralded the end of a momentous bull run that saw the total market cap of the cryptocurrency industry rise by 583% to $3.1 trillion in the 12 months to November 2021. Now standing at $1.4 trillion, the market is 54% below this all-time high, and won’t be climbing far any time soon as we face what looks set to be a painfully prolonged bear market.

Those in the cryptocurrency industry are used to volatility. Few of us bat an eyelid when we see a 20% rise or fall in bitcoin in a single day. However, to see a $40 billion stable coin – once the sixth largest cryptocurrency in the world – destroyed in 48 hours is nothing short of harrowing. We are lucky it happened now rather than later, though. 

The runaway success of UST left many surprised: to see so much money go into an uncollateralized algorithmic stable coin that relied on only a single, volatile cryptocurrency partner to maintain its peg was fairly shocking. Many digital asset platforms that pay yields on stablecoins - ours included - decided not to include UST. Any thorough due diligence assessment would have revealed that this asset could not withstand a bank run. And withstand a bank run it truly did not. 

As shown by a report published by the Luna Foundation Guard this week, in those fateful 48 hours, the governing body deployed over $3 billion of its reserves trying to maintain the UST $1 peg. This disappeared into a black hole and leaves around $82 million to repay investors that have lost significant chunks of their savings. Do Kwon, the founder of Terra, has said he will refund the smallest holders of UST first. But $82 million to refund a once $40 billion ecosystem is not going to go very far. 

The incident is causing stable coins of all shapes and sizes to wobble. Today witnessed a sharp fall in another algorithmic stablecoin: DEI, which saw its $1 peg slip as low as $0.52 in early trading on Monday as a small amount of liquidity on decentralized exchanges saw investors swap for other stablecoins. With a market cap of just $54 million, though, this is much less of a systemic threat than UST. Meanwhile, the world’s biggest stablecoin, USDT, continues to defend its peg as around $7 billion has moved to USDC and other US dollar collateralized stable coins that have less controversial audits to their name.

Of course, this is all great for skeptics of digital assets, who have jumped on this bandwagon to further cement their own views. As much as these critics are enjoying the schadenfreude, though, when we look at the rampant inflation in the US dollar, and average people struggling to afford their grocery bills, what is the alternative? We are in a situation where it is almost impossible simply to preserve wealth, let alone grow it, and our entire economic system is being sorely tested. 

Decentralized finance (DeFi) and stable coins are attempting to provide an alternative for investors large and small to preserve and grow their wealth. And this alternative remains a viable and promising landscape that presents a much more equitable and sustainable financial future compared to the situation created by practices at central banks over the past decade. 

DeFi remains a $112 billion industry - up from an $18 billion one at the start of 2021. Unquestionably, lessons must and will be learned from the UST disaster, lessons that will become deeply embedded into existing and nascent projects that will use the resulting bear market to develop the next generation of decentralized finance products. When we enter the next bull run, the fruits of their labor will be the world’s new financial system.