Billions of dollars have been pulled from the ecosystem since Terra's U.S. dollar pegged stablecoin terraUSD (UST) lost parity two weeks ago, causing massive losses for investors.
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Tracker data shows that funds held in decentralized financial apps (DeFi) created on Terra fell to a value of $155 million as of Friday morning, a level last seen in February 2021, down from more than $29 billion earlier this month. Terra DeFi's locked-in value had reached a high of $30 billion in early April.
The price losses came as the UST lost its 1:1 parity with the U.S. dollar amid a general slump in the markets. This led to a death spiral as investors exchanged UST for other stable coins, causing the Terra token to fall to a low of 4 cents on May 14.
"Suffering significant losses or seeing others suffer significant losses through no fault of their own is probably one of the fastest ways for a protocol or blockchain in this space to lose the trust of the community," said Simon Furlong, co-founder of Geode Finance, in an email to CoinDesk.
As has been widely reported, much of the loss in value is due to the Anchor credit protocol, which took the biggest hit, the data shows. On May 6, it still had more than $17 billion; by Friday, it was down to just over $106 million, a drop of more than 99%. Anchor was home to Terra's infamous "stable returns," where investors could lock in their UST to earn about 19% a year.
"The UST crash has rendered Terra's most popular protocol, Anchor, virtually useless," Furlong says, "No one is interested in earning rewards in a stable currency that tends to $0."
Market watchers had previously raised concerns about Anchor's performance, which critics called unsustainable. That hasn't stopped investors from accumulating more than $16 billion from July 2021 to early May 2022.
Other applications showed similar percentage declines. Lido, which pays daily bounties on assets in play, saw a $7 billion drop in value, while automated stock exchange Astroport and lending app Mars Protocol saw a combined $1.2 billion drop in value.
How TVL numbers fell
Because of the way USTs work, the price of the associated Moon token (LUNA) has fallen 99.7% in less than a week. A UST can be redeemed or minted for exactly $1 LUNA at any time, a mechanism designed to keep the UST stable by using market forces to match the supply and price of LUNA to demand.
Therefore, when the UST fell, a surplus of LUNA was minted to maintain parity. This time, UST failed to revive as investor appetite for the tokens waned.
The decline has led to massive losses for some of the largest investment firms in the crypto market. Data from the trade chain shows that South Korean firm Hashed lost around $3.5 billion, while Delphi lost at least 13% of its funds under management.
Terra's backers, Galaxy Digital and Three Arrows Capital, have also been affected, although the companies have not released figures.
Analysts point to problems
Although Terra's developers have implemented a revitalization plan to revive the ecosystem and ensure long-term growth, some analysts say a lack of confidence persists.
"Traders and investors have suffered huge losses and doubt the actions of management after UST's withdrawal," Anton Gulin, regional director of crypto exchange AAX, said in a Telegram chat. "Anything coming from Luna's team can be treated the same way as long as the lack of trust continues."
Terra's developers are proposing a hard fork of the network as part of the revival, which would create a new, separate blockchain. The public, however, apparently disagrees: the results of a preliminary online poll this week showed that 92% of respondents voted "no" to the proposed change.
"Trust has been lost, but in the case of compensation for losses and return of funds, there is a chance it will be restored," KuCoin CEO Johnny Lyu said in an email to CoinDesk. "If the ecosystem and team can intelligently handle the recovery process, it's a positive sign not only for the project's investors, but also for new users and the market as a whole."
This article was translated by Marina Lammertyn.