Vitalik Buterin Criticises Defi Model After Terra Crash

He talks about exploring viable mechanisms to maintain the automated pure-crypto stablecoins’ pegs while appealing not to dismiss the entire category.
Vitalik Buterin Criticises Defi Model After Terra Crash

In an analysis of the TerraUSD and Luna stablecoin crash which consequently crashed the crypto market, Vitalik Buterin said that there is no genuine investment that can get anywhere close to 20% returns per year.

The Ethereum founder is referring to the lucrative incentive of high returns offered by TerraUSD and Luna founders. The interest rate was set at 20% for UST deposits in the Terra blockchain-based lending project Anchor.

In a recent statement, Buterin said, “The greater level of scrutiny on defi financial mechanisms, especially those that try very hard to optimise for ‘capital efficiency’, is highly welcome.”

“The greater acknowledgment that present performance is no guarantee of future returns (or even future lack-of-total-collapse) is even more welcome.”

Buterin also talks about exploring viable mechanisms to maintain the automated pure-crypto stablecoins’ pegs while appealing not to dismiss the entire category.

He defines automated stablecoins by characteristics such as a completely decentralised targeting mechanism that tracks a price index, and unlike Tether & USDC does not rely on any asset custodians.

Buterin suggested that the safety of systems should be evaluated by looking at their steady state but also by analyzing how the system performs in a pessimistic state under extreme conditions and whether they can safely wind down. 

He warns of other risks associated with automated stablecoins such as technical glitches.

Buterin announced last week that he is no longer a billionaire after the steep downfall of the crypto market, due to TerraUSD and Luna.

The Luna incident has sent shockwaves across the whole crypto markets. Investors and the crypto markets alike have lost billions of dollars. Meanwhile, Luna 2.0 has entered the markets and will start trading today.

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