Cryptocurrency Terra Luna crashed over 85 per cent on Wednesday, data from CoinMarketCap shows, with the cryptocurrency trading at $6.18 as of 12:30 PM IST.
The cryptocurrency plunged over 80 per cent on Wednesday because of the UST (Terra USD), which is an algorithmic stablecoin, de-pegging fiasco.
But how are Terra Luna and UST related?
The success of the Terra ecosystem is based on the adoption of UST as a stablecoin, hence the LUNA token and UST are inextricably linked. LUNA invests in UST and loses money as demand for UST increases. After upgrades like Columbus-5, the LUNA supply may become severely deflationary in the long run.
Alternatively, if UST is seen as volatile, LUNA's value may fall. Following the Wormhole hack, UST lost its peg, causing the value of LUNA to drop temporarily.
The US dollar was devalued on May 9, 2022, and fell from $1 to $0.68. At the time of writing, it was unclear whether UST will resume its peg.
The UST Curve pool gradually shrunk as users exchanged UST for competing stablecoins when UST began trading drastically below its dollar peg. The price of LUNA, the collateral for UST fell as a result of short selling. To alleviate the negative price pressure, Terra was forced to coin more LUNA.
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The UST rate is going down. The LUNA's value dropped as a result, although the peg was not reinstalled. UST's faith was not restored by the Terran Treasury's $1.5 billion Bitcoin auction. Like bank robbers, T-bill holders would rather receive pennies than exchange them for LUNA.
Jennifer Lu, co-founder of Coinstore, explained the whole fiasco to Business Today, “The recent incident of UST losing its dollar peg has sent shockwaves across the crypto market as it has exposed the weakness of algorithm backed stable coins.
During the larger liquidations due to the macro-market volatility, UST fell down to as low as $0.60 yesterday which sparked a major sell-off in LUNA and resulted in one of the biggest price crashes in LUNA’s history.
Luna Guard Foundation (LGF) scrambled to support UST by liquidating large Bitcoin wallets for sustaining UST’s value. As we speak, LUNA is down to $11 from its all-time high of $119.18 in April 2022, this phase of instability in LUNA will remain because the overall crypto market is expected to remain choppy in the coming weeks.”
Anshul Dhir, COO, and co-founder and EasyFi Network told Business Today that investors need to exercise caution when it comes to investing in algorithmic stablecoins, “There is an intrinsic risk associated with algorithmic stablecoin; anyone who invests or has invested in them should not blame the project founders or the industry.
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The risks associated which such experiments need to be understood before putting your money in them. The risk lies not just with the founders when it comes to such experiments, but also with every user who partakes in the project.” Source: BuisnessToday.
