A situation that goes beyond what is expected, is quite predictable in hindsight, and has potentially serious consequences, is referred to as a “Black Swan” event. For instance, the subsequent breakdown of the banking sector in 2008 and the market capitulation at the beginning of the global pandemic.
In general, Black Swan is often called negative in the financial markets or any industry. But, history is proof that it has played a crucial role in positive systemic change. Experts believe that history will repeat itself.
The freefall of UST is an algorithmic stablecoin that is being considered a Black Swan. Everyone agrees that it shouldn’t have happened. Practically it was too large as it was a project that was worth more than $18 million. The intensity of the situation could have been reduced a long time ago by the regulatory controls supervising the automated trading system of the project.
The Terra’s explosion proved to be contagious as it reached BTC, leading to its price drop by $10,000 in a span of just a few hours.
A dire need for better regulation and stakeholder safeguards has surfaced as the automated decentralized finance (DeFi) trading systems are expanding in its size.
What Are The Risks Linked With Algorithmic Stablecoins?
The risks linked with algorithmic stablecoins have come to the surface, realizing that computer code is not a replacement for the asset-backed collateral.
The loophole in the design of Terra’s network has brought a project worth multibillion-dollar to zero in the span of just a few days. Besides, it has also led to a systemic risk across DeFi and the wider crypto industry.
Terraform Labs, the company behind the network, made efforts to save the UST/USD peg position by selling large amounts of BTC held in reserve.
Experts say that the event has shown that the crypto industry needs to realize that stablecoin does not always work or requires more research and advancement. Before another algo becomes successful, the regulatory and technological controls must be enacted.
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What Are The Solutions To Such Events In The Crypto Industry?
Such “black swan” events have happened earlier and will continue to happen in the future, and the crypto industry should be able to handle such events.
Experts say the answer lies in the volatility, liquidity, and the market’s reaction in the face of Black Swans.
Crypto markets have become extremely vulnerable, and even the most stable cryptos, such as BTC and ETH, are fragile. When liquidity cannot flow, all the assets will react like this.
Source: https://www.thecoinrepublic.com/2022/05/13/lunas-freefall-a-black-swan-event/