Understanding Terra/LUNA de-peg

Given that UST aimed to function as a form of money, it’s probably apt to start with how money has evolved.

=>Our starting point is when gold began to be broadly accepted as valuable.

=> Empires started putting their seal on gold coins and that was used as currency.

=> Empires reduced the amount of gold in each sealed coin without reducing the face value of the coin

=> When empires reduced the gold content too starkly, the economies faced instability and inflation. Some empires fell and new empires grew to take their place.

=> The Chinese then went on to invent paper money. The difficulty of carrying large amounts of gold led to the practice of storing gold with a banker who issued an IOU on paper. Paper IOUs could conveniently change hands and the holder of the IOU could come to the banker to redeem it for gold.

This was akin to a non-digital collateralized stablecoin. The IOU is a token pegged 1:1 to gold.

=> At some point, bankers realized that it is rare for everyone to redeem their gold at the same time and hence they started issuing more IOUs than they had gold in their coffers.

=> When bankers got greedy and issued way too many unbacked IOUs, they made themselves vulnerable to bank runs. Every now and…