Why did Terra really collapse?

Chronicle of a Death Foretold

First of all, understand how the Terra protocol works. From the project documentation:

  1. Buy on the exchange 30 UST for 27.3 USDT (at 0.91 UST/USDT)
  2. Send the 30 UST from the exchange to our private wallet, and exchange the 30 UST for 1 Luna (remember that Luna traded against the USDT at 30) in the Terra Station application. This step is the key to everything, because this is where the valuation of the UST at $1 that the documentation says is implicit: the application pays us Luna at the price that it quotes against the USDT (which is worth $1), which is equivalent to pay our UST at $1, the theoretical price it should be.
  3. We send 1 Luna back to the exchange, where we sell it for 30 USDT. Since in step 1 we bought it for 27.3 USDT, we just made a 9.9% profit.
  4. We repeat from step 1, using the 30 USDT we just got to buy 32.95 UST. Every time we do this, we put buying pressure on the UST, driving its price up and inching it back towards its $1 peg.
Change of the invariant for the valuation of the stablecoin based on the variation of the supply of Luna in the liquidity pool of the Terra market module. (Platias, N. 2019)


  • The actual behavior of the Terra market module that was the core of the protocol that was supposed to guarantee the stability of the UST did not correspond to what was described in the documentation, since it could not guarantee the redemption of UST at $1 under all conditions.
  • Implementing the market module as a Uniswap liquidity pool instead of a pure token mint / burn mechanism was a serious mistake, as doing so had inherently unstable and reflexive behavior.
  • What ultimately caused the collapse of Terra was that poor implementation of the core protocol, not an alleged attack by third parties or the fact that it was a purely algorithmic currency. Had it been correctly implemented, the idea might have worked.
  • The protocol was doomed from day one. It was a question of when, not if.

Geminon is not like Terra

As we said at the beginning, the Geminon protocol was heavily inspired by the success of Terra. However, it was also inspired by other protocols such as Frax, with an initial design halfway between the two, but with significant improvements over both. The most important differences between Geminon and Terra are:

  1. Our implementation of the stablecoin mint and redeem mechanism is done correctly: it is not a copy of the Uniswap liquidity pool as in Terra, but a proprietary design that allows in all conditions to redeem the stablecoin for its peg value without slippage and in unlimited amount (infinite liquidity).
  2. The Geminon protocol was designed to be collateralized from the beginning in a fully decentralized way (unlike Terra) and using purely decentralized assets (Frax uses centralized stablecoins).
  3. The stablecoins issued with the Geminon protocol do not keep the peg with the fiat currency, but with its associated inflation index. In the short term, its price is constant, but after a few months its peg value grows slowly, preserving its purchasing power.

Geminon protocol enhancements

Despite the fact that the design of our protocol did not have the serious mistakes that caused the collapse of Terra, in view of the events we have decided to implement additional measures to reinforce the robustness of the protocol against market events:

  1. Strong collateralization. Our initial design included soft collateralization of the protocol with established cryptocurrencies such as BTC, ETH, BNB, AVAX and LINK (a more detailed explanation of this choice can be found in our whitepaper) starting with 33% collateral. The reason behind this decision was that by planning to launch our project during the bear market, with valuations of these coins between 50 and 80% below their ATH, the level of collateralization would increase by itself in the future, being able to reach or exceed 100% in the next bull cycle. We have decided to move to a strong collateralization system, with a goal of 100% collateralization from the outset.
  2. Uncorrelated exogenous collateral. Another lesson learned from the collapse of Terra is that the high correlation between the different cryptocurrencies works against the protocol at times of greatest need, forcing collateral liquidations precisely when it is most undervalued. For this reason we have looked for alternatives that, being available within the chain, are not correlated. The choice of the rest of the protocols in this situation is to use other stablecoins such as USDT, USDC, DAI, etc. For our protocol this choice would not be suitable as its goal is to provide inflation-indexed stablecoins. For this reason, we have decided to use tokenized gold as part of the collateral using one of the existing providers such as Paxos. Geminon would thus become the first inflation-resistant stablecoin protocol collateralized by physical gold.
  3. Collateralization of the Geminon token. Existing collateralized stablecoin protocols have arranged collateral as a means of direct redemption of the stablecoin, exposing the stablecoin directly to fluctuations in collateral and leaving project token holders without any protection. We are going one step further, adopting a new system where both collateral and stablecoin redemptions are through the Geminon token. This simultaneously provides security to the holders of the token and the stablecoins, as well as greater stability of the price of the latter, since it is the protocol token that absorbs the volatility of the collateral. The principle of operation is similar to that of Frax, which uses a mixed fractional and algorithmic reserve, although the implementation is completely different (FXS is not backed by collateral, while in our protocol the Geminon token is).



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