-A 50 billion dollar lesson from Terra
Recently, Terra’s platform token, Luna, was subject to a massive sell-off in the market, thus rendering the $50 billion market cap crypto project worthless in just 2 days. The meltdown in Luna’s price has caused nearly one million investors worldwide to suffer a loss of assets, and the meltdown has also drawn the attention of regulators, with U.S. Treasury Secretary Yellen also stating before the U.S. House Financial Services Committee that “The collapse of Terra’s UST was an example of their risks, and stablecoins need to be regulated”.
The lack of liquidity is the direct cause of the Luna price collapse. The market did not have enough users and funds to support the 20% annualized return promised to users by Terra, so a large number of profitable users chose to sell their tokens to liquidate, resulting in a capital flight. However, the real reason for Luna’s collapse lies in the lack of real business support for Terra’s ecology.
An ecology without real business support is essentially a game of capital, a classic Ponzi scam. Throughout Terra’s entire ecology, its core applications are all DeFi-related protocols, these are financial tools which only provide convenience for trading and arbitrage. What can really ensure the stable development of the ecology must be non-financial applications that create real application scenarios and values.
Why are cryptocurrency assets with real business support so important?
Crypto assets, whether they are ERC20 tokens or NFTs, the majority of them are emerging assets. For emerging assets, the biggest problem lies in the instability of their value, which is reflected in the high volatility of the price. This high volatility makes it difficult for assets to be used in scenarios other than trading and derivatives trading. And after the complicated arbitrage operation, the risk of derivatives trading starts to accumulate gradually until the collapse of the whole financial system.
Therefore, in order for crypto assets to become universal value assets, they must find their practical application scenarios and complete the capture and precipitation of value in the long process of credit accumulation. As the two assets with the largest market capitalization and strongest consensus in cryptocurrencies, Bitcoin’s application scenario is chosen in the field of payment and value storage, while Ether is used as the fuel for the entire Ethereum ecology, providing functional value. Now Bitcoin has existed for 14 years and Ethereum for 8 years, but even so still avoiding high volatility. This shows that making crypto-native assets grow into universal value assets is not an easy task.
Undeniably, Terra has also made a lot of efforts to find value support for its platform coin Luna and its algorithmic stable coin UST, which includes using Cosmos’ technology to build its own underlying network and constantly building new application scenarios to enrich Terra’s ecology. However, as mentioned above, the excessive return on investment, lack of practical application scenarios and too fast development have not allowed Terra to effectively build up its application ecology, but instead has continuously pushed up the asset bubble and eventually towards systemic collapse.
Assets backed by real business will flourish in the future
Geoffrey Moore, in his book Crossing the Chasm, refers to the famous chasm theory. According to the chasm theory, technology will evolve through 5 major market stages, which are composed of Innovators, Early Adopters, Early Majority, Late Majority and Laggards. Between Early Adopter and Early Majority, there is a huge chasm because of the different characteristics and demands of the two groups of people, and if a company/project cannot cross this chasm, it will face the risk of failure.
Terra’s failure, from the perspective of the chasm theory, is that it failed to capture the demands of the mainstream market users, and therefore failed to successfully move to the next stage of market development. The pursuit of profit and return, and the mere pursuit of return is not a real need. Therefore, like many products destined to fail, Terra has put too much effort and money into false and greedy demands and has never been able to cross the chasm between Early Adopter and Early Majority.
From the development of the crypto market, the application area is gradually moving from the false to the real, to truly reach the mass market and meet the demands of the majority. In this process, NFT plays a crucial role, from pfps to music, IP and games, NFT has built a new bridge between the crypto market and the mainstream market, allowing more and more web2.0 users to become crypto users and participate in the development of the whole ecology. It can be foreseen that the crypto industry will also reach more users in the mainstream market in the next few years, and crypto assets with real business support will surely usher in a new explosion.
Application scenarios combining real assets and cryptocurrencies
In addition to waiting for a long time for native crypto assets to settle into valuable assets, the market is also exploring application scenarios and cases that can combine cryptocurrencies with real assets.
Collateralized Stablecoins
Collateralized Stablecoins are cryptocurrencies backed by real assets. Simply put, collateralized stable coins are the avatar of real assets in the crypto world. The current influential collateralized stablecoins include USDT, USDC, BUSD, etc., all of which are backed by USD/US bonds at 1:1.
Stable coins play an extremely important role in the whole crypto industry and are widely used in payment, transaction and other related scenarios. USDT is currently ranked third in terms of total market capitalization, at about $756.6 trillion, while USDC is ranked fourth, at about $510.9 trillion. USDC has been growing very fast in the last two years and it is believed that it will soon overtake USDT as the number one stablecoin. USDC’s growth and potential is due to its more regulatory and audit compliant design, as well as the fact that it is more fully collateralized in USD than USDT.
The use of stablecoins has given the market a new option to provide a more reliable asset option by mapping assets with real business scenarios and value backing to crypto assets on a 1:1 basis through collateralization.
Issuance of digital securities
In addition to collateralized stablecoins, securities token offering（STO） are also good examples of combining real business with cryptocurrencies.
Compared with ICOs, STOs have a more complete legal and issuance infrastructure and a more robust protection mechanism for investors. Therefore, STOs have naturally become the first choice for companies with low risk appetite, clear business model, relatively mature business and profitability. STOs are also attracting the attention of regulators in various countries, with both the U.S. and the EU gradually improving their legal frameworks for STOs, providing a convenient and effective way for companies to expand new financing channels and use the token economy to promote corporate eco-development.
According to Security Token Market, the current market size of digital securities is only $17.2 billion, which has great potential for growth compared to the trillion dollar market value of the crypto market. Currently, financial institutions in many countries and regions, including the US, EU, Japan, Hong Kong and Singapore, are actively preparing their own digital securities exchanges and issuing relevant financial licenses to promote the development of STOs. Among them, the U.S. is the leader in providing legislation and infrastructure around digital securities, and the most influential digital stock exchanges, such as INX and t-zero, were born in the U.S., and the number of digital securities issued by these digital security exchanges is also increasing.
At present, the market value of Terra is still going down, and although the community is trying to save itself and put forward corresponding remedial measures, the unpegged of UST is so serious that it is no longer possible to recover the loss of user assets and the reputation of the product in an effective way. The impact on the whole crypto market is undoubtedly negative, and the market needs to be warned and inspired by this man-made accident. We hope that future entrepreneurs and the market will pay enough attention to the application scenarios supported by actual business, avoid the accumulation of risks caused by the idle transfer of funds, and let the industry develop in a more stable and healthy way.
