Crypto initiatives, according to CZ, must learn to interact with their community at all times, especially during times of crisis.
After the meltdown of TerraForm Labs' LUNA and UST coins, Changpeng Zhao (CZ), the CEO of Binance, the largest crypto exchange by trading volume, has stepped out to teach a few crypto lessons.
CZ wrote on a blog on May 20 that the UST/LUNA event was regretful and impacted many individuals.
While claiming that Binance strives to protect its users, he admitted that the exchange lacked great solutions other than those provided by the community, all of which had flaws of their own.
Binance volunteered to let TerraForm Labs focus on rewarding retail investors first, according to him. Nonetheless, he noted that Terra's demise taught the cryptocurrency sector a lot.
“Theoretically speaking, when you peg to one asset using a different asset as collateral, there will always be a chance for under collateralization or depegging. Even if it is over collateralized by 10x, the collateral asset can crash more than 10x. Nothing is 100% stable (relative to something else) in this world.”
He went on to say that the worst judgment a project can make is to believe that minting more of an asset will raise its entire value. CZ emphasized that minting more LUNA would only worsen the problem because it would dilute the value of existing token holders.
CZ opposed to the use of overly strong incentives in addition to minting extra LUNA. He cited the example of Anchor Protocol, which offered a 20% annual percentage yield to encourage inorganic expansion.
Incentives, according to CZ, can attract investors. However, in order to maintain their user bases, projects must generate value.
Furthermore, CZ went on to say that, while Terra had an ecosystem with some use cases, the network's growth did not keep up with the rate at which it offered new users incentives.
Terra's expansion was hollow, he added, and the bubble eventually burst.
The Terra team, according to CZ, was slow to respond to UST's depegging. He went on to say that the corporation was slow to use its reserves to restore the peg.
TerraForm Labs might have averted the entire problem, according to Binance CEO, if it had used its reserves while the de-peg was at 5%.