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The Terra-Luna Collapse and the Role of the Anchor Protocol: A Bird’s Eye View of the Crash
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Publication Year
2024-11
Journal
재무연구
Publisher
한국재무학회
Citation
재무연구, Vol.37 No.4, pp.1-32
Keyword
CryptocurrencyStablecoinFinancial fragilityTerra(UST)-Luna CrashDecentralized Savings Protocol
Abstract
This paper explorers the contributing factors to the Terra (UST)-Luna crash in May 2022. We argue that the crash was primarily fueled by the unsustainable interest rates offered by the Anchor Protocol. Initially, Terra was designed to facilitate fee-free payments and ensure stability through a diversified demand base from payment services. However, the launch of the Anchor Protocol in 2021, with its 19.45% interest rate, shifted UST's focus towards speculative demand. This change led to an unsustainable increase in UST's supply, ultimately triggering a run from Terra. We discuss flaws in the governance mechanism for setting Anchor Protocol's interest rates. The exorbitant yield offered by the Anchor Protocol significantly contributed to undermining Terra's long-term stability. The speculative demand incited by the Anchor Protocol's high interest rates was likely a major factor in the Terra collapse in May 2022.
ISSN
1229-0351
Language
Eng
URI
https://aurora.ajou.ac.kr/handle/2018.oak/36088
DOI
https://doi.org/10.37197/ARFR.2024.37.4.1
Type
Article
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Wang,Shu-Feng Image
Wang,Shu-Feng왕수봉
Department of Business Administration
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