On Twitter, there are countless messages from investors ruined by the stablecoin TerraUSD and its “sister” cryptocurrency, Terra (also known as Luna, its ticker on the markets). This stablecoin was however very promising, the first completely decentralized one. The scandal, which broke earlier this week, further undermines investor confidence in the midst of the crypto market rout.
At the beginning of 2022, terra was the 9th largest crypto with a capitalization of over $30 billion, today the crypto is out of the TOP 200 cryptos category
Over the past few days, a stablecoin called TerraUSD and its sister currency Luna have fallen by about 80%, shaking the broader crypto market, including tokens like Bitcoin and Ethereum. Terra Luna is now nearly worthless. This has created fear among investors, even aggressive bullish crypto investors are now panicking. Here are the five important things to know about the Luna crypto crash.
Here’s a summary of what’s going on:
LUNA has collapsed to less than $0 and has lost about 100% of its market value
Terra, or $UST, is supposed to reflect the real value of the U.S. dollar, and traders are supposed to be able to exchange $UST for the $1 equivalent of Luna,
$UST is an algorithmic “stablecoin” that uses a code to maintain its price at about $1, based on a hit-and-burn system.
Terra $UST$ was designed to retain its peg to the dollar through an algorithmic system that allows it to be exchanged for Luna, and vice versa, to maintain its stable value.
A $UST$ token is created by destroying a portion of the related LUNA crypto-currency to maintain the dollar peg.
When the dollar broke away from its peg in recent days, $UST supporters increased the supply of LUNA coins in an unsuccessful attempt to bring the “stablecoin” back to $1. This huge increase in supply has caused Luna’s price to plummet.
Its value has been lost and now investors are rushing to get rid of the LUNA token.
As LUNA experiences low prices and high volatility, it is likely that the spreads between exchanges will continue to widen, which could ultimately lead to an exchange delisting.
How did the crash happen?
UST, created by Terraform Labs, is an algorithmic stablecoin, which means that instead of having cash and other assets held in a stash to back its token, it uses a complex mix of code and Luna to stabilize the process.
Crypto-currencies are full of gullible people who are sure that Ponzinomics makes a lot of money and that they will get rich while other fools will lose their money.
“The idea of an algorithmic stablecoin is that instead of having a collateral pool, you have a kind of mess, a lower quality bank pool. It’s a way of pretending that you’re building something stable out of unstable things,” said David Gerard, the author of Attack of the 50 Foot Blockchain.
“Luna was supposedly a governance token, which is a way of pretending that made-up Ponzi money is not made-up Ponzi money,” he told Euronews Next.
Things got even more complicated after Do Kwon, the creator of Terra, bought $3.5 billion (€3.3 billion) worth of bitcoins to support UST in a crisis.
Kwon’s Luna Foundation Guard said in a tweet at the time that it had withdrawn 37,000 bitcoins – worth more than $1 billion (€962,000,000) at current prices – to lend out.
The company said that “very few” of the borrowed bitcoins have been spent, but that they are “currently being used to purchase” UST. Many fear that the Luna Foundation’s custody will sell a large portion of its bitcoins to support UST.
“I think the compelling aspect of this story is that they did a little 2008 financial crisis themselves,” Gerard said.
“In the 2000s, when money was great, people had so much money they couldn’t even invest it fast enough. They said, what’s safer than real estate? Real estate doesn’t go down. So let’s bet on mortgages and mortgage-based loans. And so you had equivalents backed by a derivative of the price of this house,” he added.
The key element of the American story, aside from the fact that they did a little 2008… is that everyone knew it was nonsense.
Real estate prices, of course, went down, and then all those safe dollar equivalents collapsed with them, and everyone who depended on them collapsed.According to David Gerard, this is much the same as what happened with Terra.
“It was based on nonsense and Bitcoin was efficient at the bottom and it collapsed the price of Bitcoin, which collapsed all the other cryptos because they are all correlated,” he said.
“So they did a little 2008. They changed leverage, overleveraged, collapsed and took the real asset with them.”