In this paper, we provide a comprehensive analysis of the Terra network leading up to and during the crash. The Terra case highlights the limitations of private money creation. We show that the system’s complexity made it difficult even for insiders to accurately assess the buildup of risk and adjust system parameters accordingly. Decentralized governance mechanisms added inefficiencies to the system and further exacerbated the instability. We document that although all investors had access to the Terra blockchain, it did not create a level playing field for all investors. Wealthier and more sophisticated investors processed information more efficiently, ran more decisively, and realized much smaller losses. Our results show that in the presence of complexity, the blockchain transparency may not only fail to create an equal footing for all investors, but can also exacerbate the asymmetry between sophisticated and unsophisticated investors.

This talk is presented by the Macroeconomics Seminar, sponsored by the Department of Economics with generous gifts given through the Michael Beauregard Fund for Macroeconomics and the Economics Strategic Fund.