Does Terra Anchor Protocol 20% APY Threaten Entire Crypto Ecosystem?

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Does Terra Anchor Protocol 20% APY Threaten Entire Crypto Ecosystem?

When Terra’s UST stablecoin crashed below its $1 peg, Luna’s sister token also tanked to nearly zero, sending a multibillion-dollar shockwave through the entire cryptocurrency market. 

After the chaos, many have shared their thoughts on the Terra ecosystem. An example is billionaire investor Bill Ackman.

He tweeted on Wednesday night, “When I read about the ‘algorithm’ of @terra_money, it sounds like a crypto version of a pyramid scheme.” The project promised investors 20% returns, which are backed by a token whose value is determined by the number of new investors. “There is no fundamental business underlying it.”

Ackman added that “Luna appreciated by attracting more followers and by limiting the supply of tokens through a vesting schedule. It collapsed once the supply of sellers of Luna overwhelmed the buyers.”

UST is an “algorithmic” stablecoin, which means it has no reserves. Instead, it holds value based on an algorithm that is coded to strike a balance between the stablecoin and a partner coin, in this case, the now virtually worthless Luna. Every time a UST token is minted, the equivalent of $1 in Luna is burned, or removed from circulation, and vice versa, to maintain the peg.

To incentivize this, a Terra-based decentralized finance (DeFi) protocol called Anchor promised users a 20% return if they deposited their UST into its application.

Like other critics of Terra, Ackman explains that this was a key red flag.

“The digitization of the Luna scheme and the hype about crypto enabled it to achieve enormous scale quickly,” Ackman tweeted.

He views blockchain as a “brilliant technology with enormous potential,” but “schemes like Luna threaten the entire crypto ecosystem.”

“The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad. Hyping tokens that are not supported by businesses that create value will destroy the entire crypto industry.”

And crypto regulation could be coming soon. President Joe Biden signed an executive order in March, directing the government to “ensure responsible innovation in digital assets,” and the crypto community is watching closely, along with investors like Ackman.

Indeed, the collapse of Terra alone had investors and onlookers wondering whether it was enough to permanently damage the entire cryptocurrency market for good. While the overall cryptocurrency market is now seemingly recovering, UST remains down 88% in the last week and is trading at 9 cents. Luna lost 100% of its value in the same timeframe.

Ackman has a history of pointing out alleged pyramid schemes. One famous example was his five-year fight against Herbalife in which he vowed to destroy the supplements business because of its alleged consumer abuses. Although Herbalife emerged intact, Ackman’s allegations did result in an investigation by the Federal Trade Commission, which Herbalife settled for $200 million in 2017.

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