The Terra protocol creates stablecoins pegged to each other and consists of two cryptocurrency tokens - Terra and Luna - which can be exchanged for each other. This is the burn and mint equilibrium. Algorithmic stablecoin, Luna, is a cryptocurrency and rather than use a dollar to back its stablecoin, Terra used its native coin, UST, which was meant to be stable, whilst Luna was meant to absorb its volatility.

So, how does Terra’s algorithm work? 

More Luna is generated to purchase as much UST needed to keep it at a 1$ value. If the price of Luna goes back to normal (i.e., $1) the excess Luna is burnt. In essence, an algorithm is needed to manage the underlying token. The algorithm is constantly buying or selling to maintain the balance and so keep Terra at $1. Luna was designed to absorb the price volatility of UST, since more selling pressure for UST decreases the price of Luna.

Image credit: Bitnovo

What happened, it is believed, is that the Terra project grew too fast. This could be attributed to the high annual percentage yield (APY) of 20% , the return being offered to those who wanted to Yield Farm (where the owner of a crypto agrees to lend or borrow crypto on a DeFi platform and is paid/pays a APY based on the value of the crypto lent/borrowed). This was one of the highest in the space, and many people rushed in to take advantage of the high APY. The protocol also allowed for instant withdrawal, unlike some yield farming protocols which require lenders to lock up their crypto holdings for a set period of time. Sam Bankman-Fried, the CEO of FTX, said: “Terra was a case of “mass enthusiasm” and “excitement” with bad marketing.”

The trouble is, that whilst Terra wasn’t a Ponzi scheme it turnouts it had several loopholes that arbitragers and investors were quick to exploit. But Terra was not shrouded in anonymity as most Ponzi projects are. Furthermore, arbitragers usually take advantage of the native coin being above a dollar to make a profit - for instance, if Luna is $1.05, they could buy $100 worth which becomes $105 Luna, then sell 100 Luna for 100 UST, whereby making a $5 profit. This is a low-risk investment for most arbitragers and can also be done on the flipside. All the while they are doing this, the algorithm keeps trying to make it a stablecoin. So, what happens when many arbitragers start exploiting the market to make gains? Well, it looks like a Ponzi….. 

The second moving part is the Anchor protocol, the primary lending/protocol for the Terra ecosystem. Roughly 70% of UST in circulation is sitting in Anchor and this makes Anchor a significant stakeholder. But Anchor gave anchor tokens to borrowers as an incentive, and the amounts they get can be more than what they pay in interest. Both Anchor and Luna noticed the slack and moved to nullify them. Anchor topped up its yield reserve to $450 million. Luna upped its daily swap limit from $20 million to $100 million. This was to prevent whales from manipulating the system, but arbitragers could take advantage of high volatility if the limit was too low. Luna also raised $1 billion worth of bitcoin as a reserve for defending the UST. 

But the reserves were sold, and the Terra blockchain frozen on May 12th, all without the permission of the community. This also contributed to the death spiral of Terra.

Source: Coin98 

Luna had a vast ecosystem surrounding it; unlike most cryptocurrencies, Luna had utility.

But what, or who, caused the death spiral?

Some hedge funds are being labelled as the players that accumulated $1 billion UST and borrowed $3 billion-worth of bitcoin that brought TerraForm Labs down. Blackrock, Citadel, and Gemini securities have all denied having any involvement in the crash. The crash has intensified discussions around regulation by stakeholders; treasury secretary, Janet Yellen, has urged Congress to pass a law on stablecoins following the crash of Terra. Japan has already passed a new law to cover stablecoins whilst the UK equally has a new regulation on the way following Terra’s crash. South Korea, the birthplace of Do Kwon, is not left behind as his legal troubles are just beginning, and a digital asset committee is being launched in Korea. Recently, the US Securities and Exchange Commission is currently investigating whether the marketing of Terra violated investor protection regulations. However, Terra employees have allegedly confirmed to the SEC that Do Kwon withdrew $80 million, months before the Terra’s crash - but why did Kwon know something that others did not? Unsurprisingly, for this the SEC is investigating Do Kwon for money laundering.

The market capitalisation of five stablecoins in $billions

Source: Coingecko

Since the fall of Terra, Tether (another stablecoin) has fallen by almost $11billion. Yet Tether, even though it is not 100% $ backed, has not collapsed. Could the same be true if a commercial bank saw its deposit base fall by almost 10% in a few days? Of all cryptocurrencies, fiat-pegged stablecoins are the least risky but the challenge is that not all stablecoins are backed 100% by fiat, as was the case of the algorithmic UST. Not all cryptocurrencies are decentralised as some aspects get centralised with time and usage. If a stablecoin is to be stable, should it not backed to stable reserves? In any event, promoted not as stable but pegged to the assets it is purporting to represent? At one time, hedge fund manager, George Soros, broke the Bank of England by short-selling the British pound, making $1billion on 16th September, 1992. An event now known as Black Wednesday, the UK pound slumped so much that the government began spending £ billions in an attempt to contain the short selling - only for the UK to go into a recession afterwards. 

At the very least, algorithmic coins surely ought to have stronger risk warnings attached to them. Whilst the crypto industry has come under heavy scrutiny over the past few days, it is important to note that something similar has happened to traditional banks multiple times. Without government bail outs and support, not all would be here today and some such as Lehman brothers, indeed, did not survive. For now, whilst it has fallen in value, at least the crypto market continues to trade 24/7 allowing investors to sell as well as buy. Furthermore, we have not seen long queues of people trying to cash-in their holdings as we certainly saw in 2008 when some banks seemed to have run out of cash! When we compare the centuries old bank and the young crypto market, the crypto market has done well. Indeed, it has been sorely tested.

The applications of the metaverse are already being seen in several fields such as the gaming sector, entertainment, socialising, work, commerce, the healthcare system, and many more. The global value of the education sector is expected to be over $10trillion by 2030 and the EdTech market size alone is thought to be likely worth $318billion by 2030. Therefore, it comes as no surprise that those developing the metaverse are exploring a manner of ways in which it can be used in the education sector as a new way to teach people on a global basis. 

Global education and training sector

Source:holoniq.com

What is the metaverse? 

A more comprehensive description considers the metaverse as the next generation mobile-computing platform which will take advantage of artificial intelligence (AI), augmented reality (AR), virtual reality (VR), and an ever-increasing connectivity to create online environments which are more immersive, experiential and interactive than what currently exists.

The metaverse as an educational tool 

When it comes to education, learning and training, there is more need for innovation. Schools and education centres do more than simply training; they actively shape and prepare young people for the future - something which goes beyond the workplace, lecture theatres, classrooms, and colleges. The metaverse has many established uses in the digital age but when it comes to education, there are speculations as to how the metaverse will significantly improve the sector, offering a new more immersive way of teaching and sharing knowledge using a wide range of one’s senses in a more memorable manner.

How can the metaverse change education? 

Among the 4 existing types of metaverse - augmented reality, lifelogging, mirror world and virtual reality - virtual reality is the most diverse and actively used technology for educational purposes. Regardless of their real-life geographic locations, teachers and students can meet up in a virtual space through a virtual reality headset. Using the metaverse in this manner presents endless possibilities and a remarkable potential impact on education - for example, a group of students scattered around the world (but with a common interest in learning history) and a teacher based in Nigeria who travels the world looking at and researching historical places. Although this sounds like an impossible classroom, with metaverse the teacher could ‘virtually’ meet with the students - irrespective of the different locations - and show them around ruins and castles. A more interesting feature of the metaverse is its ability to create a highly immersive 3D environment. This exciting feature helps not only in teaching but it improves assimilation, since it provides a serene and virtual academic environment creating the impression as if you were actually in a different place.

Although teaching and learning via the metaverse seem like an impracticable concept, it is already in use. Roblox is a Singapore-based firm using the metaverse to help make education global, interactive and memorable. It allows people to build and share their virtual worlds akin to Minecraft and Fortnite. This concept was originally for creation purposes for the firm’s 40 million users; however, the feature has been expanded upon to include Roblox classrooms (the classrooms may be virtual or not). The Roblox virtual classrooms allow students and teachers to log-in from wherever they are in the world. The lessons may be based on different things - for example, physics simulation to teach the student about the subject in a safe virtual environment, or role-playing simulation of historical events. Asides from eliminating the geographic barriers to learning, more than Roblox, the metaverse creates a therapeutic, immersive form of learning environment which improves both concentration and assimilation. A further example is STEMuli, which uses the metaverse to create the first hybrid school and lessons in Dallas in the US. Meanwhile, the metaverse is already being used by firms such as Accenture, as the publication, Forbes, has described: “Accenture built a corporate metaverse, the Nth Floor, so employees and new hires could have a new way to connect and collaborate.”

Benefits of using the metaverse as an educational tool 

Unlike Roblox, Minecraft and Fortnite, which have cartoonish visual aspects and can distract students from learning, a metaverse environment can be designed to look realistic, and captivate students. The metaverse environment also can replicate real-life locations. In the real world, more often than not teachers are unable oversee everything happening in a classroom. However, a metaverse educator has complete control over students' interactions and can even limit bullying or, by changing some permissions in the virtual space, separate students for disciplinary purposes. On the 14th April, 2014, 276 schoolgirls were abducted in Chibok, Borno State, Nigeria. Since the 15th of April 2022, a total of over 1500 pupils have been kidnapped in Nigeria. Certainly keeping children in their homes rather than grouped in one area together with learning via a digital environment could have prevented disastrous incidents such as this, as well as school shootings. 

Disadvantages of using the metaverse as an educational tool 

The metaverse can present us with an entirely different learning experience from traditional schooling. A disabled child with a speech, hearing or visual impairment may indeed need bespoke support since it might not be understood or realised that the child needs help when interacting. Also, logging dozens of hours per week in a digital world for education and entertainment might result in the child neglecting his life in the real world and impair his real-life relationships, or even health and well-being. As yet, we do not know what the long-term effects of hours in the metaverse could result in. For anyone ever having worn a VRT headset, you may have experienced the initial disorientation of wearing it, or even the dizziness when you take the headset off. When it comes to virtual reality, there is also a case of accessibility and affordability. It will be difficult to adopt a means of education that currently is not widely available and cannot be afforded by the majority. 

However, the rise of the metaverse has brought infinite possibilities and shown its potential to revolutionise sectors and occupations, such as entertainment, gaming, socialising, work and commerce. The education sector is certainly not excluded since the metaverse has the potential to upgrade many aspects of learning. Going forward, this new concept is undoubtedly expected to contribute to improving teaching, learning, and comprehension.