Designed to fail: terra and the limits of arbitrage

Speculative ‘attack’ exposed fundamental flaws in crypto’s algorithmic stabilisation mechanism

Perhaps the most shocking thing about the collapse of terraUSD this month was how many people saw it coming. Most crypto investors blame the stablecoin’s failure on a targeted attack by speculators, akin to how George Soros ‘broke’ the pound in 1992. While the assault was a surprise, to many in the industry the collapse was inevitable.

TerraUSD, commonly referred to as UST, and its sister token luna were linked by an arbitrage mechanism designed to ensure UST would hold a steady price of one

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