Monday, February 6, 2023

Bill Ackman Says Terra Is Only A Crypto Version Of A Pyramid Scheme

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Billionaire Bill Ackman says Terra is only a crypto version of a pyramid scheme with no underlying business so let’s read more about it in today’s latest cryptocurrency news.

The billioanire Bill Ackman says Terra is a crypto version of a pyramid scheme since investors were promised major returns of 20% backed by a token whose value is driven by demand from the new investors in the token and there is no fundamental underlying business. The 20% returns mentioned referred to the high yield earned on Terra’s popular Anchor Protocol Application and those rates dropped to 18% which are expected to drop again in June. The founder of Pershing Square Capital Management criticized LUNA for creating artificial demand by limiting the supply in a vesting schedule.

The vesting schedules are a common investment practice where the investors’ tokens are locked up for a period of time and distributed evenly after the said time. In the case of LUNA, if an investor purchased LUNA in the seed round, the token would be locked up for 10-18 months and after the lockup period, the tokens were distributed:

“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.”

Ackman however praised the blockchain technology calling it brilliant and saying that it has enormous potential. But if the industry doesn’t get its act together, the potential could be missed:

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

Terra is a decentralzied algorithmic stablecoin ecosystem that was launched by Terraform Labs and Do Kwon back in 2018. the ecosystem composes of two tokens, LUNA and the UST stablecoin. UST is a stabelcoin using the mint and burns mechansim involving LUNA. The users can swap $1 worth of LUNA and UST and vice versa so the arbitrage between the coins keeps UST at its dollar peg. If the price of UST trades above a dollar, the investors can mint 1 UST for $1 worth of LUNA and sell the minted UST for a smaller profit. If UST trades under a dollar, the users can buy the discounted UST and swap it for $1 and then sell the LUNA on the market for a smaller profit.

LUNA 24-hour Price Chart (Source: Coingecko)

The mechanism soured and UST lost about 90% of the dollar peg so today it trades at $0.0949. the crashing UST led to a wide-scale minting of LUNA and drove down the demand and dilute the asset’s supply which resulted in LUNA and shed 100% of its value in a few days. LUNA trades at $0.0001819 from the ATH of $119.18 as per the data from CoinMarketCap.

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