The Terra ecosystem and its native token, Luna, have been in the news for a few days. The LUNA token has collapsed by over 99% and seems unable to recover. At the same time, the UST is no longer able to regain its parity with the dollar. The entire Terra ecosystem now seems doomed.
In this video, we're going to tell you about Terra Luna, and the reason for its collapse.
So, watch this video all the way through, so you don't miss anything.
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Without further ado, let's get straight to the point.
Terra is a blockchain project, a solution similar to Ethereum, allowing the creation of smart contracts and DApps. These include decentralized finance, lending, and borrowing protocols that are very popular in the crypto ecosystem.
Blockchain was founded by Terraform Labs in 2018, a Seoul-based company, this project has two major tokens at the heart of its ecosystem. First, is the ecosystem's native token, the LUNA. This is the one used to pay transaction fees on the blockchain. It had a sensational 2021 and early 2022 trading up to $119.55 during its All-Time High. As a reminder, its launch price at the ICO was just $0.80, and it was only $1 in January 2021!
So, everyone who participated in the ICO did more than 150X.
LUNA quickly became the 6th largest capitalization in the crypto market. It has established itself as one of the most promising projects in the sector. Along with Solana or even Avalanche, the project was often cited as one of the most promising ecosystems in the crypto sphere. Founder Do Kwon has also become an atypical and charismatic figure in the crypto world, often criticized for his arrogance and mocking tweets.
At the heart of his ecosystem is also the in-house stablecoin named UST. The latter is indexed to the value of the dollar, like USDT or USDC. The major difference is that it is algorithmic, unlike USDT and USDC. In order to guarantee the value of the latter with the dollar, a burn mechanism of the LUNA and the UST is put in place to always balance supply and demand.
It's an innovative stablecoin model that doesn't require as much collateralization as traditional models, but it's also a new system that we don't have full control over. This is one of the reasons why Terra has fallen in recent days.
Terraform Labs had some reserves, especially in Bitcoin, to guarantee the peg of the UST in case of problems. Almost 3.5 billion BTC were available to prevent this kind of crash.
UST is at the heart of decentralized finance of Terra through the Anchor protocol. It was one of the most popular DeFi protocols in the crypto sector, as it offered an annual return of nearly 20% on UST stablecoin.
A tempting promise that attracted many retail investors. But also, institutions and companies looking for interesting returns.
Despite the precautions, it seems that the innovative nature of this stablecoin has dragged the entire ecosystem down with it.
But then, concretely, why did LUNA collapse?
Before we tell you why it dropped, if enjoying the video, let us know by leaving us a “Like” and sharing this video if you haven't yet. Now, let's continue.
LUNA has seen a dramatic drop in recent days and is currently trading around $0.01. A ridiculous price compared to the highs reached a few weeks ago. So how did it come to this? Well, for some, like Cardano's founder Charles Hoskinson, Terra has suffered an attack, highlighting the intrinsic flaws of its operation.
According to him, an institution borrowed 100,000 Bitcoin from the Gemini exchange. They would then have exchanged a large portion of the BTC for UST, outside of the market with Do Kwon for a reduced price, which reduces the liquidity of the UST.
This institution would then have sold and dumped a large amount of BTC and UST in the market. This would have caused a cascade of liquidation on leveraged buy positions, in particular, the price spread, and panic selling by investors. Many people have sold their LUNA and unstake UST, especially on Anchor to sell them.
Some people have characterized Terra Luna as a Ponzi scheme that did not have enough BTC in reserve, despite its recent purchases, to prevent such a crash. None of these accusations have been verified and Gemini denies having made such a loan. However, such manipulations do exist in the crypto market. Indeed, Terra has been the victim of an attack.
The only thing certain at the moment is that UST and LUNA do not seem to be recovering from this descent into hell. These events seem to have already become part of the history of the young cryptocurrency market. They will certainly mark a turning point in its development.
Now, what you don't know is that the Terra Luna crash affected Bitcoin, Tether, and other cryptos.
In fact, Bitcoin (BTC) fell to $25,400 this week after losing the $27,000 support level and dropping to levels not seen since December 2020. With concerns about rising inflation and the failure of a controversial stablecoin project, the cryptocurrency has fallen further into losses.
Bitcoin dropped to $26,595 on May 12, but fortunately, it has bounced back up to $30,000 by the time we record this video.
The value of Ether, the second-largest cryptocurrency, fell below $2,000 for the first time since July 2021 due to the Terra Luna crash. Ether fell 23 percent to $1,852.
The sharp rise in costs, coupled with the ongoing trade war, has given traders a case of the shakes. U.S. inflation data released Wednesday showed that prices for goods and services rose 8.3% in April, exceeding expectations and approaching the highest level in 40 years. The fall of the controversial stablecoin platform Terra also weighed on investors' minds.
If UST fails to regain its peg to the dollar, Luna will likely continue to collapse. Even if it restores its status as a stablecoin, there will be a lot of lost confidence in the stablecoin, thus, lost faith in LUNA.
The purpose of a stablecoin is defeated if it can crash well below its allotted value. With the competition between stablecoins, money is likely to flow to competitors DAI, USDC, and Tether. For LUNA to regain its price, there must be a return of consumer confidence in the UST stablecoin.
Only a few months before this drastic drop in the price of UST, Luna was recognized as one of the most reliable stablecoin projects. While this news is horrible in the short term, there is still hope for Luna to regain its prowess as a true stablecoin competitor.
First, a UST repeg needs to happen, followed by algorithm improvements, and finally restoring the trust of the crypto community. None of this is guaranteed, let alone in 2022. A pump to the broader markets would also be essential to help Luna reach $200. While this perfect storm is unlikely, it's not out of the question.
Luna is trading at a steep discount to its price just a month earlier. However, this price drop is justified by its inability to stabilize UST. With the UST losing its peg to the dollar, there is no longer a reason for its existence. That being said, it is still possible that the UST will be able to regain its dollar peg. If that happens, there is still a long way to go to learn and improve the protocol, as it is clearly insufficient. It will be up to the markets to decide whether UST and LUNA can be trusted again.
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