The Terra-Luna Crash and Its Impact on Alternative Payment Methods

Learn more about what caused the Terra-Luna crash and how it affects the outlook for alternative payment methods.

Back to earth- the terra-luna crash and its impact on alternative payment methods

On the 11th of May 2022, the crypto market underwent a catastrophic correction when the prices of terraUSD and its sister coin, Luna imploded overnight. This crash wiped out nearly $17 billion worth of value from a market with a current cap of $40 billion.

It also resulted in a mass selloff of other crypto products, namely Bitcoin, Ethereum, and even stablecoins like Tether. All of which have caused governments and regulators to begin questioning the value of cryptocurrencies and their inherent volatility.

So, what caused such a disastrous outcome?


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What is Terra / Luna?

The terms Terra and Luna tend to be used interchangeably, which gets quite confusing. So, to clarify, Terra is an open-source blockchain that creates Terra and Luna tokens.

Unlike Tether, Terra is not backed by any fiat currency reserves but is instead "algorithmically pegged" to always be valued at $1. Its sister coin, Luna, is burned by trading it for USDs to create more USTs. Hence, maintaining the balance of TerraUSD and Luna allowed it to remain stable.

But as we'll see, this wouldn't be the case.

Terra & Luna: Coming Back Down to Earth

Cryptocurrencies are one of the most important developments that have come about in recent times. It has opened up new possibilities and made the concept of decentralized finance possible.

There could be a future where cryptos are set to replace fiat currencies as the default medium of exchange. And as trust in government and public institutions continues to fall, it's easy to see why some feel this way.

While digital assets are decentralized and traceable, they're also unregulated and volatile, because of this, their weaknesses can also be used against you.

The Terra/Luna crash came about when online finance platform Anchor began offering yields of up to 20% to users who would stake USTs with them. Keep in mind that the returns were paid out of Terra's reserves. Almost immediately, critics noted that the platform couldn't offer  such rates. Others compared it to a Ponzi scheme which would fall apart with time.

And they were proven right when UST repeatedly failed to meet its $1 peg. As a result, depositors began withdrawing funds from Anchor in what was described as a crypto-style bank run. This led to a massive oversupply of Luna and caused the currency to go into a death spiral that was felt across other crypto markets, including Bitcoin.

The result was a bloodbath that saw investors losing their life savings and regulators calling for tighter restrictions on the crypto market. It also highlighted several vital weaknesses inherent in the crypto market.

While some believe that cryptocurrencies have the potential to be used as legal tender, the risk is too great as of yet. Assets that display such volatility make it nearly impossible to value goods and services, hence why many countries want to regulate but are struggling to understand.

We believe that cryptocurrencies have a role to play in the future; however, their volatility is still a significant obstacle. And here is:

Why Fiat Currencies Payments Will Always Be Relevant
1. Greater Stability

When it comes to commerce, stability is the name of the game. Excessive volatility makes it impossible to price goods and services accurately. After all, merchants and customers can hardly be expected to transact in currencies that may suddenly become worthless overnight.

Although crypto contracts do exist, high levels of uncertainty mean that digital assets have a long way to go before becoming a part of the mainstream. On the other hand, fiat currencies like the U.S Dollar are widely-recognized and are often used as an international currency due to their stability.


2. Higher Rates Of Acceptance

While cryptocurrencies allow users to transfer funds instantly from anywhere around the world seamlessly, they are still not widely accepted. All of which makes it difficult for businesses to access new markets.


3. The Trust Factor

Fiat currencies are trusted because a central monetary authority guarantees their value. However, cryptocurrencies do not enjoy such backing, which leads to significantly higher levels of volatility.

Also, unlike fiat currencies, crypto trading is unregulated. This has led to several high-profile cases of blatant market manipulation by individuals like Elon Musk, who took advantage of the situation to profit from crypto's volatility.

Payment Platforms: Facilitating Seamless Cross-Border Transactions
1. Providing added flexibility

From military-grade encryption to 2FA, crypto wallets have come a long way since the early days for DeFi. However, most of these wallets accept crypto payments exclusively and are unable to process fiat currencies.

Hence, making it rather inconvenient for merchants who have to manage multiple payment platforms. Rather than foregoing cryptos entirely, we at XanPay have chosen to offer customers the best of both worlds.

Our payment platform allows merchants to receive fiat currency payments in any denomination along with cryptocurrencies such as USDT or Tether USD. As a stablecoin, Tether is backed by U.S Dollar reserves, which provides it with a considerable degree of legitimacy. All of which allows merchants to enjoy the best of both worlds while still having their eye on the ball.

 

2. Widely Accepted Across Asia Pacific

With its vibrant economy and investment-hungry governments, the Asia Pacific region is one of the most attractive business destinations in the world. However, providing customers with adequate payment channels can be difficult with so many countries to work with. Also, there's the question of cross-border transactions.

Fortunately, this doesn't have to be the case thanks to the uptake of e-wallets and RTPs. These platforms allow customers to easily perform transactions by scanning a QR code or inputting basic information such as a phone number.

And while Asia Pacific makes use of various e-wallets and payment systems, XanPay simplifies all this by facilitating payments with a single platform, thus allowing merchants to open up new payment channels for customers all across the region.

 

3. Compatible with E-Wallets and RTP

As we've seen over the past few years, the uptake of e-wallets and other alternative payment methods has grown tremendously, especially in the Asia Pacific region. Convenience and the rise of mCommerce are just some factors behind this exponential surge.

If businesses are to leverage the solid economic growth in this area, they will need to cater to the needs of their customers, which includes supporting their favored payment methods.

XanPay: Paving The Way Forward

Alternative payment methods such as cryptocurrencies are here to stay. However, their usage as a mainstream medium of exchange remains questionable given their inherent volatility.

This is why payment platforms like XanPay allow businesses to bridge the gap between cutting-edge technology and stability. For more information on what XanPay can do for your business, check out our website here.

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