The events around the meltdown of Terra's stablecoin TerraUSD (USTC -1.76%) and native cryptocurrency Terra (LUNC -0.27%) were likely extremely painful for many investors. But amid this downfall, there are valuable lessons to be learned. Even those who did not invest in Terra can learn from others' mistakes.
Terra is likely a failed experiment that will never recover. While a noble pursuit, Terra's effort to create an ecosystem of algorithmic stablecoins can serve as a reminder for all investors.
There are a handful of reasons that led to the demise of Terra's blockchain. The goal here is not an "I told you so" but rather to elaborate on factors that sealed the fate of Terra and hopefully help investors make more-informed decisions.
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The centralization in decentralization
Terra was a project that claimed to be decentralized. But underneath the surface, there was plenty of evidence that this portrayal lacked some truth.
When a blockchain is decentralized, there is an added layer of protection for investors. Centralized blockchains could be compared to publicly traded companies that trade on the stock exchange. Like these publicly traded companies, there is a group of individuals making decisions for the blockchain. This could be related to the size of block rewards, the consensus mechanism used, or even if a hard fork should be pursued, like the founder of Terra recently proposed.
In Terra's case, this centralized group decided to pursue some strategies to help steer the blockchain through the recent turmoil. Even some of their previous decisions led to their downfall.
For Terra, this group of decision makers was known as the Luna Foundation Guard. It claimed to be a "nonprofit organization" that is "dedicated to creating and providing greater economic sovereignty, security, and sustainability of open-source software and applications that help build and promote a truly decentralized economy."
The Luna Foundation Guard consists of eight people who control most of Terra's destiny. They were in charge of purchasing the Bitcoin (BTC -0.80%) reserve to back the UST stablecoin in case it lost its peg to the dollar. When it recently lost its peg, this group released the funds to help keep UST afloat. It didn't work.
The ultimate lesson
For those who had money in Terra, they were essentially entrusting this group to make all decisions related to their investment. If an investor supports the goal of a particular centralized group behind a blockchain, then an investment is plausible.
However, the goal of a cryptocurrency is to put power back into the holder's hands. This was the intent for creating cryptocurrencies in the first place. They were meant to be an escape from centralized sources of money. Cryptos that are truly decentralized use the potential of blockchains. Subsequently, these can be some of the most attractive projects for investors.
Decentralization alone does not provide promise or a risk-free investment. It is just one aspect that should be evaluated before making a decision. However, those cryptocurrencies that are more centralized possess a more substantial degree of risk.
New cryptocurrencies will continue to come out. They all should be scrutinized to ensure that they possess qualities of decentralization. If not, then investors are permitting some other entity to make decisions. Cryptocurrencies are risky enough; take the extra time to ensure your investment is safe.
