Terra (LUNA): What caused one of the largest cryptocurrency crashes in history?
Terra (LUNA) investors have lost approximately 96% of their investment in the last seven days. Over the last week, the price of LUNA has dropped by approximately 96% to $0.2546. According to data on CoinMarketCap at the time of writing, LUNA has dropped by about 96.42% in the last 24 hours.
Terra’s market capitalization has also decreased and moved up to the rank ‘61’, which is concerning. Terra’s price and ranking have plummeted to new lows, which is even more surprising given that it was formerly one of the top 10 cryptos on CoinMarketCap.
Before diving into this article, it’s vital to understand what an algorithmic stablecoin is and how TerraUSD (UST), an algorithmic stablecoin, is linked to LUNA.
What are Algorithmic Stablecoins?
Unlike traditional stablecoins, algorithmic stablecoins are supported by an algorithm that creates incentives for traders to keep the price stable. The value of these coins is determined by algorithms that allow traders to create and destroy coins as needed to maintain their price. The end result should be the same as before: a stable coin that is virtually always comparable to the price of a fiat currency like the dollar.
However, some have questioned this strategy. When the algorithmic stablecoin IRON lost its dollar peg due to a selloff by significant investors, well-known investor Mark Cuban reported he lost money. Stablecoins will be the first to be controlled, according to him.
Terra (LUNA) & TerraUSD (UST)
Do Kwon, a South Korean crypto engineer, and his company Terraform Labs invented TerraUSD. It keeps its dollar worth by relying on traders to burn or create tokens for profit in order to keep the price consistent. TerraUSD and Luna, another Terraform Labs coin, are mutually dependant on this process. When a TerraUSD token is created, the equivalent amount of Luna is burned, and vice versa.
When the price of TerraUSD falls below $1, traders can buy a dollar in Luna and burn TerraUSD. As a result, the quantity of TerraUSD tokens is reduced, and the price of the token rises. Traders are enticed to burn Luna in return for a dollar in TerraUSD if the price of TerraUSD reaches a dollar, increasing supply and lowering the price.
Why did LUNA and UST go down?
The crisis began when Terra’s algorithmic-based Stablecoins TerraUSD, which are pegged against the dollar, began to decrease in value. Binance even temporarily halted withdrawals of UST and LUNA, causing a cascade effect in the prices of both cryptos. The present fiasco has brought to light the flaws in algorithmic-based stable coins.
“Terra’s fall could be attributed to large scale selloffs of the LUNA tokens owing to the reported “de-peg” of the algorithmic stable coin. This selloff must have also exacerbated the market already being in a largely bearish mode,” Anshul Dhir, COO and Co-founder of EasyFi Network told FE Online.
Terra’s market capitalisation is presently under $1 billion ($758.46 million at the time of writing), according to CoinMarketCap. This is in stark contrast to its all-time high market cap of around $25 billion.
For the time being, investors can only hope that the market will gradually stabilise and help them recover their losses.
Road ahead
Bitcoin lost almost 30% of its value in the previous month, resulting in major selloffs and liquidations. This was another factor that played a major role in the LUNA crash. With the crypto market in a state of panic, this could be a good time to jump in and purchase the dip. However, because of the volatile nature of cryptocurrencies, even in this downturn, investors are hesitant to invest. Despite the common investment dilemma between mining vs buying crypto, the majority of investors are now getting into remote mining because hardware prices have dropped as a result of the market meltdown, and since it is considered one of the safest and most lucrative investments.
