It’s Not Just LUNA. Terra’s DeFi Apps Have Hemorrhaged $28B

Investors have largely exited the Terra ecosystem – now evident in DeFi protocols on the blockchain – and analysts remain skeptical about its long-term prospects.

AccessTimeIconMay 20, 2022 at 12:50 p.m. UTC
Updated May 11, 2023 at 4:41 p.m. UTC
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In the two weeks since Terra's U.S. dollar-pegged stablecoin terraUSD (UST) lost its peg, causing massive investor losses, billions of dollars have been taken out of the ecosystem.

Data from trackers show funds held in decentralized finance (DeFi) applications built on Terra have slumped to $155 million in locked value as of Friday morning, a level last seen in February 2021, from more than $29 billion at the start of this month. Locked value on Terra DeFi peaked at $30 billion in early April.

The declines came as UST lost its 1:1 peg against the U.S. dollar amid a broader slump in markets. That created a death spiral as investors exchanged UST for other stablecoins, sending the Terra token to as low as 4 cents on May 14.

“Experiencing significant losses, or seeing others take significant losses – at 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,” Simon Furlong, co-founder of Geode Finance, told CoinDesk in an email.

DeFi apps on Terra have seen billions of dollars in eroded value after UST's implosion. (DeFi Llama)
DeFi apps on Terra have seen billions of dollars in eroded value after UST's implosion. (DeFi Llama)

As widely reported, much of the lost value was on the lending protocol Anchor, which took the biggest hit, the data show. It held more than $17 billion on May 6 and locked up just over $106 million on Friday – a drop of over 99%. Anchor was home to Terra’s infamous “stable yields,” where investors could lock up their UST to earn about 19% on a yearly basis.

“UST’s fall rendered Terra’s most popular protocol, Anchor, effectively useless,” Furlong said. “Nobody is interested in earning rewards on a stablecoin that is trending toward $0.”

Market observers had previously raised red flags about Anchor’s yield, with critics calling it unsustainable. That didn’t deter investors from piling in over $16 billion from July 2021 to early May.

Other apps show similar percentage declines. Lido, which pays out daily rewards on staked assets, saw a $7 billion plunge in value, while automated exchange Astroport and lending app Mars Protocol saw a combined $1.2 billion decline in total value locked (TVL).

How TVL figures fell

Owing to the way UST operates, the price of the associated luna (LUNA) token fell as much as 99.7% in less than a week. One UST can be redeemed or minted for exactly $1 worth of LUNA at any time, a mechanism that's meant to keep UST stable by using market forces to alter the supply and price of LUNA to match demand.

As a result, when UST fell, excess LUNA was minted to try and maintain its peg. This time it failed to revive UST as sentiment for the tokens among crypto investors declined.

The slump has caused some of the biggest investment firms within the crypto market to suffer massive losses. On-chain data shows South Korea’s Hashed lost some $3.5 billion, while Delphi lost at least 13% of its funds under management.

Terra backers Galaxy Digital and Three Arrows Capital have also been affected, although the firms have not publicly provided figures.

Analysts point out issues

While Terra developers have put a revival plan in place to recover the ecosystem and ensure long-term growth, some analysts say a lack of trust remains.

“Traders and investors suffered tremendous losses and doubt management’s actions that followed the UST unpegging,” said Anton Gulin, regional director at crypto exchange AAX, in a Telegram chat. “Anything incoming from Luna’s team may be treated in the same way as the lack of trust prevails.”

Terra developers are proposing a hard fork of the network – which would create a separate, new blockchain – as part of the revival. The community is apparently not on board, however: Results of an online preliminary poll this week saw 92% of responders vote “no” to the proposed change.

“Trust has been lost, but in the event of compensation for losses and a return of funds, there are chances for its restoration,” KuCoin CEO Johnny Lyu told CoinDesk in an email. "If the ecosystem and the team can handle the recovery process wisely, this will be a positive signal not only for project investors but also for new users and the entire market.”


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Shaurya Malwa

Shaurya is the Deputy Managing Editor for the Data & Tokens team, focusing on decentralized finance, markets, on-chain data, and governance across all major and minor blockchains.

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