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- 1 Terra Ecosystem collapsed in May 2022.
- 2 The crypto industry learned a great deal from the collapse.
On May 9, 2022, Terra Ecosystem collapsed, wiping over $40 Billion; here’s what the industry learned in a year. This major event caused industry leader Bitcoin to drop from $28,000 to $19,000. However, people in close proximity lost a lot. It was also a wake-up call for the industry to enhance user protection, liquidity, and transparency.
Terra Ecosystem Collapse & Lessons Learned
Terra was once the third largest ecosystem after Bitcoin and Ethereum, and it collapsed in just three days in March 2022. The epicenter of the problem was a lending and borrowing protocol, Anchor, promising high yield to its UST depositor. The postmortem of the collapse reveals that the run on Terra was hard to understand and involved multiple chains and assets.
Many large holders of UST adjusted their position on May 7, 2022, followed by multiple traders. As blockchain technology allows the actions of others to be viewed, this facility increases the speed of the run. Some investors were first to run and experienced slammer losses, while others who came late to the party incurred heavier losses.
The system’s complexity made it very difficult even for the insiders to understand the buildup of risk.
Preventing governance attacks after a considerable devaluation of Terra LUNA, the blockchain validator stopped the network activities on May 12, 2022. The crypto community was largely frustrated over the occurrence of such an event. Many pointed out the lessons learned from the incident, the most crucial being never to trade emotionally.
Certified data expert, Obinna Uzoije, argued about the requirements of due diligence for emerging projects before investing. As the volatility of the crypto market is a well-known fact, it would be wise to invest with proper research. Moreover, heavy losses can be incurred if such a process is followed.
A member of the Tera Community stressed the requirement of a risk management system. Such a mechanism helps investors avoid losses in crypto by providing a framework where risks are managed. Also, investment decisions should be beneficial if made after deep analysis and planning.
The mechanism should include stop-loss orders, which would automatically cancel the positions if the price fall below a certain level. Moreover, diversifying the portfolio into multiple digital assets would be helpful.
When the ecosystem collapsed, the world’s biggest crypto exchange allowed retail investors to be compensated first. They viewed this situation as a sign that responsible leadership could make an industry difference. Some even pointed out that the incident could foreshadow positive changes in the industry because it forced the companies to scrutinize their risk assessment strategies and keep user protection at the forefront.
However, the overall reaction to the anniversary of the Terra crash was mixed, as some are still in the red with the losses while others are looking at the future with optimism.
Where is, Do Kwon?
Terraform Lans co-founder Do Kwon and associate Chang-Joon were arrested in Montenegro’s Podgorica airport in March 2023. They were using false documents as their passports were confiscated in their country of origin South Korea in October 2022. The court has accepted their bail proposals for 400,000 Euros ($436,000) each, and they will be put under house arrest.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
