Beosin security team: What is the impact on Web3 after LUNA’s crash and DeFi “fled”

May 18 01:18 2022

After a continuous plunge, the cryptocurrency LUNA price has fallen from $119.5 on April 5 to close to zero (and still in the process of oscillating downward), from 119.5 all the way down, the “moon goddess” finally went down the altar.

While everyone is concerned about LUNA’s crash, yesterday, Vitalik, the founder of Etherpad, released a paper titled “Decentralized Society: In Search of the Soul of Web3” in conjunction with E. Glen Weyl, Principal Researcher at Microsoft Research, and Puja Ohlhaver, Researcher at Flashbots.

The paper notes that today’s Web3 revolves around the expression of transferable financialized assets, but that many core economic activities — such as unsecured lending and building personal brands — are built on enduring, non-transferable relationships. Thus, the paper elaborates on how non-transferable “soul-bound” tokens (SBTs), which represent the promises, credentials, and affiliations of “souls,” encode networks of trust in the real economy. At the same time, SBTs support applications such as community wallet recovery, witch-resistant governance, and new markets with decomposable, shared rights.

While everyone is concerned about whether LUNA will hit a new low, perhaps we can think about what kind of impact this LUNA-driven cryptocurrency crash will have on Web3.0?

 

LUNA in a death spiral?

Terra is an algorithmic stablecoin platform that runs on the Proof of Stake (PoS), the underlying proof-of-stake blockchain built using Tendermint, and LUNA is Terra’s platform token for the issuance of stablecoins (TerraSDRs), price stabilization, and network governance. Users can use LUNA tokens to exchange for TerraSDRs stablecoins and vice versa. In this way the price stability of the stable coins is guaranteed.

LUNA is the mining coin of the Terra DPoS blockchain and Terra is powered by LUNA. Thus, miners provide stability and security. On the exchange, the protocol offers stable mining rewards in all economic conditions by virtue of transaction fees and minting taxes.

According to its operation mechanism, when the market demand for UST increases and the price is higher than $1, users can send $1 of LUNA to the system (LUNA is burned) in exchange for 1 UST (UST is minted). Conversely, when UST demand decreases and the price drops below $1, users can send USTs (USTs being burned) to the system in exchange for $1 LUNA (LUNAs being minted), thereby reducing the market supply of USTs and restoring the anchoring relationship between USTs and dollars.

On May 10, the Terra ecosystem’s native algorithmic stablecoin, UST, experienced a severe de-anchoring event due to capital roundup and debt crisis, and LUNA began to continue to fall.

TerraUSD (UST), the algorithmic stablecoin of the Terra ecosystem, has fallen to $0.01 on May 13.

In a May 11 article paraphrased, the author wrote: “Veteran DeFi players should know that the impact of this UST de-anchoring may not stop at the Terra ecosystem, just like the Lehman Brothers bankruptcy, the crash of the LUNA ecosystem could ripple throughout the crypto market.”

And today, the answer has emerged.

LUNA crashed, DeFi fled

The DeFi industry had experienced explosive growth in value in the last two years, and now DeFi is also experiencing a crisis brought about by the crash of LUNA.

According to DefiLlama data on May 13, the current DeFi lockup on the Terra chain fell to nearly $800 million, a 79.29% decrease in the last 24 hours. This compares to April 2, when DefiLlama data showed a $33.66 billion DeFi lock-up on Terra’s chain.

DeFi’s vision is to map the real financial system to the digital world, enabling direct transactions between ordinary users through smart contract technology, enabling various functions of traditional financial institutions, such as derivatives, lending, trading, wealth management, asset management, etc.

DeFi is widely worried for the market: when the coin price falls rapidly, it has the potential to create a negative feedback death spiral effect on the system.

In a securities report, researchers noted that the combinatorial, convergent nature of the various project contracts within DeFi brings about complex nesting and correlation between coins, and that a drop in coin prices will certainly bring about a faster and broader risk transmission than in traditional financial markets.

What is clear is that mainstream collateral, mainstream LP transactions are critical to the performance of asset and project token prices for the health of the DeFi ecosystem; a scenario of rapidly falling prices creates a severe test for the DeFi ecosystem, and the probability of a seemingly death spiral occurring is not small; especially in light of the recent plunge in major token asset prices, the DeFi ecosystem is facing a greater test than the traditional financial markets.

The DeFi boom is just the beginning of massive Web3 innovation, and when DeFi is affected, it will also affect Web3 development.

How the crash of LUNA will affect Web3?

Web3 had leapt to become one of the hottest technology terms in the technology world in 2022.

The Internet in the evolution process, often accompanied by a full range of storage, network, software updates, from Web1.0 to Web2.0 era, Internet technology more to point, line state iteration, while Web3.0 era is presented by 5G, VR, AR, blockchain, cloud computing, chip, edge computing and a number of technology full integration of the situation.

Web 3.0 is not only the iteration of past technologies, but also the integration of many technologies. Blockchain technology will become the core technology of Web 3.0 era: Web 3.0 technology architecture is divided into basic layer technology, platform layer technology and interaction layer technology. Compared with the Web 2.0 era, Web 3.0 involves more subdivision technology categories and a wider range, and blockchain technology becomes the core underlying foundation technology of Web 3.0 because of its decentralized characteristics.

It is undeniable that the LUNA crash and the DeFi “fled” have also had an impact on the development of Web3.

This incident will certainly affect the mindset of Web3 practitioners in the short term, as Spartan Group partner Jason Choi tweeted.

Dragonfly Capital partner Haseeb Qureshi tweeted 4 lessons about losing a lot of money.

Preventing dangerous projects and the need for security audits

Is the LUNA debacle over, maybe not yet. When we are talking about blockchain projects, there are more things that need to be prevented.

For example, whether the project is involved in Ponzi scheme, whether the project contract code is safe, and whether the project party should pay attention to the abnormal situation of funds in time. Beosin EagleEye allows project parties and users to discover risky transactions in time, so that they can take measures quickly. For example, immediately suspend the relevant services, or inform the user to cancel authorization, etc., to avoid subsequent greater losses. In addition, project security audit remains important.

When LUNA continues to fall, DeFi experiences fled, NFT starts to shake, Dao is trying to find ways to save, when the unknown, anxiety and fear are intertwined, the development of technology is our primary goal to pursue, and the blockchain Web3 world, I think, will still be new and strong one day.

About Beosin

Beosin is a leading global blockchain security brand co-founded by several professors from world-renowned universities. The team consists of 100+ security experts, including 40+ PhDs and postdocs. The core team members have accumulated over 20 years of experience in formal verification technology, cybersecurity, artificial intelligence, and big data mining technology.

Beosin product series include smart contract audit service, blockchain platform audit service, smart contract detection product, and ‘Eagle Eye’ product. Through security audits of more than 2,000 smart contracts and 50+ public blockchains worldwide, Beosin has successfully protected nearly $10 billion of assets and has been fully recognized by global partners.

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