Once the eye candy of investors and the top-performing crypto, Terra LUNA coin ended up being one of those shitcoins that fell prey to pump and dump trading strategy. UST was the only decentralized stablecoin that was operating as per the algorithm designed by Terraform Labs, headed by the CEO Do Kwon.
UST has been the backbone of Terra ecosystem and is the reason behind the demand of LUNA tokens. Driven by a solid algorithm, it was bound to succeed but suddenly the dream run ended in a catastrophe.
Do Kwon was also the creator of a failed stablecoin named Basis Cash (BAC)
In order to understand why and how this happened, we have to understand how UST worked in the first place and then work our way towards evaluating the reasons of its crash and finally decide, whether or not you should buy LUNA again –
How UST-LUNA worked before the LUNA crash?
UST stablecoin shared a direct relationship with LUNA tokens. Since both the tokens are linked with an algorithm, the number of LUNA tokens minted depends upon the demand of UST. In short, higher the demand of UST, the greater will be the value of LUNA.
UST was pegged against USD in a 1:1 ratio
About the Algorithm:
In order to understand the algorithm. Let’s assume there’s a demand for 100 UST in the market. In order to supply UST, a similar value of LUNA has to be burnt. Again, we have to assume the current value of LUNA in this scenario is $10 per token.
Checkout the launch of Terra 2.0 & LUNA Airdrop.
Therefore, to fulfil the demand for $100 worth of UST, 10 LUNA tokens have to be burnt, which equates to $10x10 = $100. This mechanism helps supply UST and the burning of LUNA tokens will automatically drive up its price.
If the UST peg fell below or goes beyond $1 mark, arbitrage traders will jump-in and balance the equation as explained in my post on Terra LUNA coin.
Why did Terra LUNA crash?
The same reason that led to the rise of LUNA, also led to its demise in 2022. It’s the algorithm and the famously known UST bank i.e Anchor Protocol. It didn’t take much time for the smart investors to recognize that Terra’s Anchor protocol is a Ponzi scheme that’s offering a whopping 20% annual interest on UST deposits, hence driving up the demand for the token artificially without having a real-world utility.
Because of the high APR, the demand of UST rose which ultimately led to the rise of LUNA token. However, it was unclear how Anchor protocol was able to issue such a big return without having any significant product. Many believed it to be a money circulation scheme within the Terra ecosystem using Anchor Protocol.
The Big UST Dump:
By now, we know that the price of LUNA token is directly proportional to the UST demand. Imagine if there’s a flood of UST within the crypto ecosystem, the supply of UST will surge and will result in the fall of LUNA price. An excess supply of UST will also put pressure on the algorithm and makes it unstable to maintain UST peg.
This exactly happened on May 09, 2022. A large number of UST is dumped in the market, which initially led to the fall of LUNA token. This event started a chain of panic selling among the UST investors who stored their deposits on Anchor protocol to earn higher rewards. Hours after the news, the mass sell-off of UST took place and ultimately eroded the price of LUNA.
Many believe it’s the big firms like Blackrock & Citadel behind the dumping of UST. They waited for the right moment to slay UST after recognizing the flaw in its algorithm and its native application Anchor Protocol. Check the explanation below –
LUNA fell from $100 to less than $0.10 within 3 days.
LUNA buyers took no time but to sell their share to prevent further loss. Amid the crash, the UST peg fell below $1 adding to uncertain market conditions. It went down to $0.39 and was unable to recover.
Terraform Labs & LFG (LUNA Foundation Group) had an impressive Bitcoin reserve but was unable to save UST because the price of Bitcoin also fell at the same time during LUNA crash.
Should to buy LUNA after the crash?
The trading was halted at the time of writing this post. As we speak, the network is taken offline and the team is working to repair the ecosystem. The legal team of Terra has already resigned for unknown reasons while the founder Do Kwon’s credibility is in question since it’s the second time a stablecoin has fallen under his leadership.
There are speculations that LUNA will see the sun again but without UST. It will be launched with a new algorithm that will be pegged against a basket of cryptocurrencies. Though the revival is questionable but one thing is clear, Terra has lost the trust of its investors.
The damage is heartbreaking. The crypto market has witnessed another worst year after 2018. Even if the LUNA relaunch itself, it won’t be able to match its previous growth trajectory. Long story short, it will take years for LUNA and Terraform Labs to build trust and create a strong ecosystem from here. I highly discourage investors to park their money back in LUNA and leave it to their risk appetite.
This completes my review of the Terra LUNA crash. In the next post, I will talk about BETA Finance & LOOM network. If you’re a fan of blockchain technology then do share this post on your social handles and educate everyone around you. Remember to subscribe to my YouTube channel for more informative content, released every week.
An MBA in Marketing. Paras have a decade long experience in the corporate world. He is done with office politics and corporate life, therefore decided to move on and jumped on building Katoch Tubes. He is a crypto fanatic and has the vision to bring cryptocurrency knowledge to every household in the simplest form possible using the power of internet. His area of expertise includes online marketplace, cryptocurrency and content strategy. Reach out to him on Twitter & YouTube.