Excellent John K. Kumi is a cryptocurrency and fintech enthusiast, operations manager of a fintech platform, writer, researcher, and a huge fan of creative writing. With an Economics background, he finds much interest in the invisible factors that causes price change in anything measured with valuation. He has been in the crypto/blockchain space in the last five (5) years. He mostly watches football highlights and movies in his free time.
According to the CEO of Pershing Square Capital Management Bill Ackman, Terra operated as a Ponzi scheme, and its crash could affect the entire crypto ecosystem.
Terra Stablecoin (UST) recently crashed below $1, causing a serious meltdown in the crypto market. UST has no reserves, so it is categorized under the “algorithmic stablecoin”. This asset is designed to always strike a balance between the stablecoin and a partner asset called Luna. In this case, $1 worth of Luna is burnt anytime a UST token is minted to ensure that the stablecoin maintains its peg. Interestingly, Terra-based decentralized protocol, Anchor promised a 20% reward to users who deposit their USD into the applications. According to the CEO of Pershing Square Capital Management Bill Ackman, Terra operated as a Ponzi scheme, and its crash could affect the entire crypto ecosystem.
“Investors were promised 20% returns backed by a token whose value is driven only by demand from new investors in the token. There is no fundamental underlying business,” said Ackman.
Ackman further explained that the supply of Luna tokens was limited through a vesting schedule as more investors purchased the digital asset. After the sellers had overtaken the buyers by a considerable margin, Luna collapsed. This, according to Ackman, is a sign of a Ponzi Scheme. Its ability to pull through and succeed in the initial stage was due to the digitization of the scheme and the unprecedented hype of the crypto market.
The billionaire recognizes the fact that blockchain is a brilliant technology with huge potential. However, he believes that Ponzi projects like Luna threaten the entire crypto ecosystem.
Some sections of the crypto community believe that the crash of the Luna ecosystem is somehow good as it informs investors, especially, the newbies that the market could be very risky. Also, it is feared that this could trigger a harsher regulation that could cripple the good and the bad crypto projects. Ackman believes that this should be considered to protect the ecosystem.
“The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad. Hyping tokens that are not supported by businesses that create value will destroy the entire crypto industry,” he said.
The crypto regulation would be introduced anytime soon as US president Joe Biden has signed an executive order directing the government to come up with responsible innovation in the digital space.
Terra co-founder Do Kwon earlier proposed to launch a fork of the blockchain but the majority of the community members voted against it. Also, Yonhap, South Korean regulators have instructed exchanges to report all transactions linked to the Terra blockchain project.
Ackman previously vowed to destroy Herbalife Nutrition Ltd (NYSE: HLF), by accusing them of consumer abuses. This led to an investigation by the Federal Trade Commission. In 2017, Herbalife settled for $200 million.