According to knifefight, the UST/Terra stablecoin structure was a circular Ponzi scheme that used hubris for collateral. So why did so many smart people fall for it? (Via CointelegraphZN)
The Terra protocol used a built-in exchange rate to keep the price of UST stable, where anyone could exchange 1 UST for $1 worth of LUNA. When demand for UST exceeded its supply and the price rose above $1, arbitrageurs could convert LUNA into UST at the contract and then sell it on the market for a profit. When demand for UST was too low, the same traders could do the opposite and buy cheap UST to convert into LUNA and sell at a profit.
You could convert your deposit into ownership of the bank, but you couldn’t actually withdraw it because the bank itself didn’t own anything at all.TerraUSD was not the first attempt at building an uncollateralized stablecoin. The streets of crypto are littered with the bodies of previous failures. Some prominent examples include Ampleforth’s AMPL, Empty Set Dollar, DeFiDollar, Neutrino USD, BitUSD, NuBits, IRON/TITAN, SafeCoin, CK USD, DigitalDollar and Basis Cash.
Terra’s real innovation on the traditional Ponzi was splitting its targets into two symbiotic groups: a conservative group that wanted to minimize downside and an aggressive group that wanted to maximize upside . Pairing Ponzi-like economics with a stablecoin let Terra market itself to a much wider range of investors, allowing it to grow much larger than previous crypto Ponzis.
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