Billions of dollars have been withdrawn from the ecosystem in the two weeks since Terra's U.S. dollar-linked stablecoin terraUSD (UST) lost its peg, resulting in massive losses for investors.
Data from trackers show that funds held in decentralized financial applications (DeFi) based on terra have plummeted to $155 million in locked value as of Friday morning, a level last seen in February 2021, from more than $29 billion earlier this month. Terra DeFi's locked-in value peaked at $30 billion in early April.
The declines came as the UST lost its 1:1 peg to the U.S. dollar amid a general market slump. This led to a death spiral as investors exchanged UST for other stablecoins, sending the Terra token to a low of 4 cents on May 14.
"Experiencing significant losses or seeing others suffer significant losses - through no fault of their own - is probably one of the fastest ways for a protocol or blockchain in this space to lose community trust," Simon Furlong, co-founder of Geode Finance, told CoinDesk in an email.
As widely reported, much of the loss in value was on the Anchor credit protocol, which suffered the most damage, the data shows. It held more than $17 billion on May 6 and closed Friday at just over $106 million - a drop of more than 99%. Anchor was home to Terra's infamous "stable returns," where investors could lock in their UST to earn about 19% on an annualized basis.
"The fall of the UST has rendered Terra's most popular protocol, Anchor, virtually useless," Furlong said. "No one is interested in earning returns on a stablecoin that is trending toward $0.
Market watchers had previously raised red flags about Anchor's returns, and critics called them unsustainable. That hasn't stopped investors from pouring in more than $16 billion between July 2021 and early May.
Other apps showed similar percentage declines. Lido, which pays daily rewards on deployed assets, saw a $7 billion drop in value, while automated stock exchange Astroport and lending app Mars Protocol saw a combined $1.2 billion drop in total value (TVL).
How the TVL numbers fell.
Due to the way USTs work, the price of the associated Luna (LUNA) token fell 99.7% in less than a week. A UST can be redeemed or minted for LUNA worth exactly $1 at any time. This mechanism is designed to keep UST stable by using market forces to match the supply and price of LUNA to demand.
When the UST fell, excess LUNA was minted to maintain the peg to the UST. This time, UST failed to revive as sentiment for the token dropped among crypto investors.
The slump has led to some of the largest investment firms in the crypto market suffering massive losses. On-chain data shows that South Korean firm Hashed lost around $3.5 billion, while Delphi lost at least 13% of its funds under management.
Terra backers Galaxy Digital and Three Arrows Capital were also affected, although the firms have not released figures.
Analysts point to problems.
Although Terra developers have put in place a revival plan to restore the ecosystem and ensure long-term growth, some analysts say a lack of confidence remains.
"Traders and investors have suffered huge losses and doubt the actions of management following the UST unpegging," Anton Gulin, regional director at crypto exchange AAX, said in a Telegram chat. "Anything coming from Luna's team could be treated the same way, given the prevailing lack of trust."
Terra developers are proposing a hard fork of the network as part of the revival, which would create a separate, new blockchain. However, the community is apparently not on board: in a preliminary online poll this week, 92% of participants voted "no" to the proposed change.
"Trust has been lost, but in the case of compensation for losses and return of funds, there are opportunities for its restoration," KuCoin CEO Johnny Lyu told CoinDesk in an email. "If the ecosystem and team can handle the recovery process wisely, it will be a positive signal not only for project investors, but also for new users and the whole market."