This is the next step for Earth as the failed cryptographic project attempts a new path forward

Tether previously claimed that its stablecoin was backed 1 to 1 by US dollars.

Justin Tallis | Afp | Getty Images

This week, supporters of the failed Terra cryptocurrency project voted to revive the initiative, with a new blockchain and token luna – and without its controversial algorithmic stablecoinTerraUSD.

The founders were looking for the next step forward for the project which crashed as quickly as it took off collapse of the Earth project led to combined losses of approximately $ 60 billion between the stablecoin, also known as UST, and its cryptocurrency sister luna. Earlier this month, the FSO plunged below its $ 1 peg that began a cryptocurrency clearance sale.

Like many stablecoins, UST was pegged at a 1 to 1 ratio to the dollar. Coining a new UST required “burning” or destroying a moon. This structure allowed for fundamental arbitrage opportunities to keep the peg: users could always trade a moon for UST and vice versa at a guaranteed price of $ 1, regardless of the market price of both tokens at the time.

“What the Moon ecosystem did was have a very aggressive and optimistic monetary policy that practically worked when the markets were doing very well, but it had a very weak monetary policy for when we encounter bear markets,” Stuti Pandey said. a Web3 investor and risk partner at Farmer Fund.

This isn’t the first time a decentralized algorithmic stablecoin has failed. Many in crypto had hoped that the Earth project could be successful. But it could be a long time before investors recover Land fiasco this month – and this could put the new project on unstable ground.

“There is a big question mark. If this is successful, it will take a long time to rebuild trust with investors and builders,” Felix Hartmann, managing partner of Hartmann Capital, told CNBC.

“It will also take a lot of ungrateful effort on the part of Luna’s founders because they will no longer have the billion dollar market capitalizations they had before – they will likely start on the ground floor again,” he added. “So it’s something worth watching, but maybe the real fruition – if it ever happens – would be over a year or two. Certainly not this month.”

Regulatory hurdles also loom. Stablecoins ranked first for regulators for the exact same reasons highlighted by the collapse of TerraUSD: lack of transparency in trading stablecoins and the reserves that support them, as well as the dependence of market participants on them to enable trading in other cryptographic protocols. .

“Algorithmic stablecoins as an idea are dead,” said Omid Malekan, a cryptocurrency industry veteran and adjunct professor at Columbia Business School.

“There are others out there not as big as UST and they are all in a state of inability to hold the peg right now,” he added. “That failure has somehow made the other stablecoins more conservative – those supported by fiat – very interesting in comparison. But the open question now is also what kind of regulatory response the whole industry gets.”

CNBC’s Ryan Browne contributed to this story.