In the early hours of May 16, the night sky turned copper red as the year’s solitary lunar eclipse conjured a rare Blood Moon. For holders of the LUNA cryptocurrency, the phenomenon must have felt like a celestial joke. Days earlier, the native asset of the Terra blockchain had plummeted from $80 to under $1 a token, reducing $40 billion in value in an event that’s been dubbed Mt. Gox 2.0.
Crypto’s darkest hour since the insolvency event that shuttered the Mt. Gox exchange in 2014, LUNA’s demise has eclipsed the collapse of BitConnect and the market crash of March 2020. The Luna crypto crash of early May saw the Terra Luna crypto plummeting to an all-new low, crashing hard in terms of pricing, with its stablecoin, TerraUSD (UST) losing its peg.
At the time of publication, the Luna Classic price is down 6% and currently sits at $0.000091. At the same time, UST has also gained momentum and is down by 6.95% ($0.03356) in the last 24 hours.
What Does Terra do?
Terra is a blockchain network that specializes in stablecoin creation. The network was founded in 2018 by Do Kwon and Daniel Shin of Terraform Labs. Terra provides smart contract capability for the creation of a wide range of different stablecoins. The project has stablecoins pegged to the U.S. dollar, South Korean won and euro, among others.
Tokens in Terra’s ecosystem are represented by two token types: LUNA and a family of Terra stablecoins.
What is LUNA?
LUNA is Terra’s native token and plays four different roles in the Terra Protocol:
A mechanism to absorb demand fluctuations for stablecoins minted on Terra to maintain price pegs
A method to pay transaction fees in the Terra network
A way to take part in the platform’s governance system by creating and voting on proposals regarding changes to the Terra Protocol
Staked in Terra’s delegated proof-of-stake (DPoS) consensus mechanism to facilitate the validation of network transactions
What Happened To Terra Luna?
The Luna crypto crash comes from its link to TerraUSD (UST), the algorithmic stablecoin of the Terra ecosystem.
UST is an algorithmic stablecoin and is operated via computer codes that help maintain its price equilibrium. The process involves burning or minting LUNA/UST to maintain the price of these tokens.
When a UST is minted, $1 of Luna is burned, while this also happens the other way around for Luna minting and UST burning. As UST threatens to go below its peg, holders will sell their UST (or burn it) for $1 of Luna, making a slight profit. This is until UST rises above $1 when the opposite encouragement happens.
After a large amount of UST was dumped, the stablecoin started to debug. More UST was sold in a mass panic, minting more Luna and increasing the Luna circulating supply. This had the knock-on effect of then crashing the price of Luna.
This circulating supply inflation has drastically increased since the crash. Previously, the circulating supply sat at around 345 million Luna. On May 12, it was 3.47 billion Luna, according to analytics data. As of July 26, it was now 6,568.79B LUNC, where it remained ever since. Luna burns attempted to reduce this circulating supply.
The Luna Foundation Guard (LFG) had been purchasing Bitcoin to save UST from debugging. However, the practice did not work amidst the gradual crypto meltdown.
Why did LUNA Crash?
Before the collapse, over $2 billion worth of UST was unstacked (taken out of Anchor Protocol), and hundreds of millions of that was immediately sold. Whether this action was in response to a particularly volatile period, the fact that rising interest rates had affected the broader cryptocurrency market or a malicious attack on Terra’s ecosystem is an ongoing topic of debate.
Nonetheless, this huge selling pressure initially pushed the price of UST down to 91 cents. Of course, the bottom fell out of the currency, and it now sits well below a penny.
Luna Crypto Crash: The Aftermath
Following the crash, several crypto exchanges such as Binance delisted Luna and UST pairings. Trading suspensions were also prevalent in the lead-up to the weekend. A Luna Coinbase listing, previously set for launch by the end of June, has also quietly been pulled.
Luna's Do Kwon published a recovery plan for Luna, which seemed to have a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below the $1 mark once again. It has since plummeted below 1 cent.
Dropping to new lows, Luna has now been abandoned, with Terra launching a new chain and new coin - Luna 2.0. The recovery chances remain up for debate, with the Luna 2.0 price remaining volatile.
Meanwhile, Luna Classic remains the old chain and old coin. Meanwhile, there's also talk of a UST 2.0, too.
The next step for Luna will be to regain its original market cap, but this still seems quite far off, given its market cap is now $1.5 billion.
However, the LUNC token after receiving an update dubbed LUNC V22 has soared past 50% in terms of pricing and is currently trading at $0.0003491. The update has introduced a staking mechanism back in the LUNC ecosystem, further boosting its price up a notch.
LUNC token is swaying back and forth in terms of pricing at press time, but it still remains in a prominent position. The Luna Classic team has also launched a new governance alert bot which may be triggering LUNC to hold on to its current price momentum.
Luna Crash's Impact On Crypto Market
The Terra Luna crypto crash seems to be both a symptom and instigator of some of these major cryptocurrency price drops.
After the Luna Foundation Guard and Do Kwon purchased around $3 billion worth of BTC, the success of the Terra ecosystem became more linked to the wider cryptocurrency market through Bitcoin.
With the LFG and other market makers having to sell these Bitcoin reserves in an attempt to stop the UST depegging, this had a ripple effect on the wider market, seeing Bitcoin drop below the $30,000 mark. LFG revealed it sold over 80,000 Bitcoin in an effort to do so.
Aside from the impact on crypto prices, it has led to further skepticism about stablecoins, particularly algo-stablecoins. The Shiba Inu stablecoin SHI may be forced to rethink its plans following the UST depegging.
However, the crypto market now appears to be bouncing back, with Bitcoin returning to the $30,000 price and Ethereum returning above $2000. Nevertheless, the cryptocurrency community remains shaken by the collapse of UST and Luna, adding to an already uncertain period.
Following Luna's massive crypto crash, the Justin Tron-backed USDD has also lost its peg to the US dollar. The fall of LUNA and UST is now being compared to the latest USDD depeg.
Will LUNA Recover?
The token has the potential to recover, but at present, things are extremely uncertain. At the time of writing, LUNA has been delisted from many major crypto exchanges including Binance and OKX. Moreover, operators have repeatedly halted the Terra blockchain because of security concerns.
In the aftermath of the Terra ecosystem collapse, many developers, communities, investors and families have been devastated — some individuals lost their life savings and rumors have circulated that as many as eight traders took their own lives.
Additionally, crypto information sites like CoinMarket Cap are warning investors that the token is extremely volatile and has already lost over 99% of its value.
Nonetheless, the situation surrounding UST and LUNA reinforces the risk of algorithmic stablecoins and the importance of diversification in the cryptocurrency industry. The founder of Terra Protocol, Do Kwon, recently released a revival plan which can be viewed here.
As the saying goes, only when the tide goes out can you discover who’s been swimming naked. As the waters receded from the Terra ecosystem, leaving LUNA holders high and dry, it transpired that a lot of those who should have known better were caught bathing in the buff. From hedge funds to influencers, investors of all kinds were, to use the vernacular, rekt.
The cryptocurrency industry is nothing if not adept at reinventing itself, however, and in the wake of Terra’s demise, leading lights have vowed to learn from its failures and ensure that history cannot repeat. The disaster, sparked by the failure of Terra’s algorithmic stablecoin UST, induced a “death spiral” that slashed the dollar-pegged asset to mere cents and saw the LUNA token hemorrhage 99 percent of its value.
Many in the crypto industry believe the project’s implosion provides an opportunity to de-risk and design more robust systems that will withstand extreme economic shocks. This is likely to be too little to late for policymakers and regulators are driven by consumer protection and market stability mandates who have set out to tame crypto.
Looking ahead, it may take some time for the broader cryptocurrency market to heal from the Terra Ecosystem collapse. Despite setbacks, the cryptocurrency community is still learning and innovating. Events such as the fall of UST act as key lessons for the budding industry that may allow for the creation of more secure and stable cryptocurrency projects moving forward.
No comments:
Post a Comment