Story: TerraUSD & Luna crash and hope for recovery; 19-05-2022;
TerraUSD, Luna crashed! but how & Why? Burning Luna would solve the problem?
• TerraUSD and Luna fell down recently and the fall was historical but why it happend and how?
• After a massive fall in the prices of both the coins, is there a Hope for recovery left?
• Terra was ranked among the 10 most valuable cryptocurrencies and peaked at almost $120 last month.
Stablecoins claim to be a relatively safe haven in the highly volatile crypto world, and are supposed to maintain a 1-to-1 peg with the US dollar, simply meaning that the stablecoin's value would stay equivalent to of a Dollar (USD), regardless of the crypto market fluctuations.
One such giant stablecoin TerraUSD proved that, this theory is completely wrong with its crash, proving that they are just as volatile as other cryptocurrencies.
Understanding the difference between Stable and non-stable coins:
Before talking about how the TerraUSD (UST) the so-called stable coin and its sister coin Luna fell down historically, we first need to understand what is the difference between them.
The TerraUSD is supposed to be stable in nature, and supposed to maintain a 1-to-1 peg with the US dollar, simply meaning values should be equivalent to of a Dollar (USD), regardless of the crypto market fluctuations.
TerraUSD has its Price linked with dollar, with the help of some algorithms, which determines its value.
While the Luna is a non-stable coin in nature, meaning that it does have a fluctuating value, depending on the trade of the coin and other systems, such as TerraUSD's value.
TerraUSD and LUNA coins are connected to each other:
The one thing in common in both coins is that, these coins were made to help and balance each other, meaning support the value of the other. Every time a UST token is minted, the equivalent of $1 in Luna is burned, or removed from circulation, and vice versa, to maintain the peg.
If Luna's values were to fall, the TerraUSD are used to convert into Luna coins and vice-versa for the TerraUSD, through a mechanism by the parenting company Terra.
How they fell down historically?:
On 9 May 2022, UST began to break its peg to the US dollar. Over the next week, the price of UST plunged to 10 cents, while Luna fell to "virtually zero", down from an all-time high of $119.51.
The so-called stablecoin TerraUSD, or UST, turned out to be not stable, as its values fell off like 99%, in just a few days. The TerraUSD crashed almost completely at one point on Thursday last week and lost its $1 peg to the dollar, tanking to a low as $0.26.
Things started to look quite dizzy and uncomfortable for the entire ecosystem of the Terra when its creator Do Kwon purchased $3.5 billion (€3.3 billion) worth of Bitcoin to support UST in the event of a crisis, earlier this year.
What exactly triggered the fall is not known, many critics blame the collapse on Terra’s algorithmic stablecoin structure and UST’s fast growth seemingly without proper funds to back it, one another dominant theory blames that the depeg caused by a massive attack, which included huge sale off of the TerraUSD into the market.
According to this theory which was posted on tweeter, there was a “concerted attack” on the Terra ecosystem in which the claimed attacker made off with over $800 million.
And because TerraUSD or UST is an algorithmic stablecoin, it didn't have any cash and other assets held in a reserve to back its token, but instead it works on a complex mix of code and Luna to stabilise the process.
But the algorithms failed to co'op with such huge fluctuations, and the devaluation were inevitable afterwords.
As a result of TerraUSD's price fluctuations, the sister coin Luna too started losing its value.
Luna coins flooded the market as a result of massive sell-out, resulting in the value loss by more than 97 per cent on Wednesday, dropping below $0.22. By Friday, Luna collapsed to nearly $0.
In a fragile attempt to stop the fall, Kwon’s (Founder of the Terra) Luna Foundation Guard (LFG), an organization that supports the Terra ecosystem, then tweeted, it had withdrawn 37,000 Bitcoins—worth $1.5 billion—in loans denominated in Bitcoin and UST, after the stablecoin lost its peg to the U.S. dollar. But this move too failed and the values further deteriorated.
On Saturday, Terra’s UST stablecoin lost its peg to the U.S. dollar. Panic selling became predominant, and the results came as a historical fall, for a top coin and a stable coin as well.
Throughout the week, UST and Luna continued to crash, leaving many confused and very concerned.
How and if the coins would come back to their glory days?:
If there is any hope for TerraUSD and Luna to come right back up from its massive fall?
There are some speculations that it might come right back up, as one theory suggest that, a massive burn of Luna coins would help the values to go right up. People are demanding that Luna shall be burned rather than a new Luna 2.0. Forked version be introduced, which is said to be planned.
Second theory says that if Luna be trusted again and massive buying kept on done by holders and investors, then it would be back on the track soon.
But many experts suggest that it is not likely to happen in the long run because the trust has been broken, and the coin has lost its values massively the swift recovery does not seem that easy.
According to the Coinmarketcap the current circulating supply of Luna is 6,533.44B while its max supply is 6,907,366,873,012. The Terra blockchain has officially halted and UST has remained de-pegged from the US dollar since 9th May 2022.
Is it worth buying Terra Luna in 2022?
The majority of analysts are confident that LUNA is worth buying today because its prices will recover, creating an entry opportunity at this level and an uptrend into the foreseeable future.
As of 16 May 2022, blockchain analysts claim that the usage of the bitcoin reserves of LFG still remains largely uncertain.
Brief History for TerraUSD and Luna:
Terra is a blockchain protocol and payment platform used for algorithmic stablecoins.
Created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin.
It is most known for its Terra stablecoin and the associated Luna reserve asset cryptocurrency.
The collapse of the stablecoin TerraUSD (UST) and Luna, wiped out almost $45 billion in market capitalisation within a week.
TerraUSD, was the third largest stablecoin by market capitalisation before its collapse in May 2022.
Terra is a group of algorithmic stablecoins, named according to the currencies to which they're pegged—for example, TerraUSD (UST) is pegged to the U.S. dollar. Luna serves as the primary backing asset for Terra, and is also used as a governance token for users to vote on Terra community proposals.
UST stablecoins were not backed by US dollars; instead, it was designed to maintain its peg through a complex model called a "burn and mint equilibrium".
This method uses a two-token system, whereby one token is supposed to remain stable (UST) while the other token (LUNA) is meant to absorb volatility.
Investors who deposited UST in the Anchor Protocol were receiving roughly 19% yield that was paid out from Terra's reserves.
Due to such a high-yielding mechanism of the Anchor Protocol, some critics raised concerns that Kwon's stablecoin model could function like a "ginormous Ponzi scheme".