A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra

Authors

  • Jaewoo Cho Hansung University

DOI:

https://doi.org/10.5195/ledger.2023.283

Keywords:

Stablecoin, Algorithmic stablecoin, De-pegging, Cryptocurrency, On-chain analysis

Abstract

The collapse of Terra's algorithmic stablecoin UST shocked the cryptocurrency market. This study investigates the underlying causes of the de-pegging event through an in- depth analysis of the token economics of the Terra blockchain. Using on-chain data, this study identifies a misalignment in the economic incentive structure of the blockchain protocol as a key contributor to the de-pegging. It is found that an undercompensation of UST when it was redeemed played a significant role in the de-pegging event, with the UST price on cryptocurrency exchanges following the redeemed value of UST that users could obtain by swapping UST for LUNA and selling it on the market. The results highlight the importance of properly designing the incentive structure of blockchain protocols to ensure their sustainability and security.

References

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Published

2023-04-07 — Updated on 2023-04-10

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How to Cite

Cho, J. (2023). A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra. Ledger, 8. https://doi.org/10.5195/ledger.2023.283 (Original work published April 7, 2023)

Issue

Vol. 8 (2023)

Section

Research Articles

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Copyright (c) 2023 Jaewoo Cho

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