The collapse of Luna Crypto and the UST stablecoin, both related to the terra blockchain, has thrown the cryptocurrency market into chaos.
TerraUSD and its sibling currency Luna have plunged roughly 80% in the previous few days, shaking the entire crypto market, including tokens like Bitcoin and Ethereum. Terra Luna is nearly worthless now. This has caused investors to become fearful, and even the most aggressively bullish crypto investors are suddenly panicking.
Over $15 billion in cryptocurrency worth has been lost, raising worries about stablecoins in general. Politicians and regulators have taken notice of the tragedy.
Here are the top five things you should know about the Luna crypto meltdown.
What are Luna crypto and Terra stablecoin?
A stablecoin is a cryptocurrency whose price is fixed to the US dollar or the Euro, implying that it is less volatile than other cryptocurrencies such as Bitcoin or Ethereum, which are more volatile and prone to a sharp surge or decrease.
When investors want to make a fair profit while avoiding the regular volatility associated with cryptocurrency, they turn to stablecoins. Tether and USD Coins are two popular stable coins. Any stablecoin pegged to the US dollar should ideally maintain its $1 per token value, however, this was not the case in the Luna-Terra catastrophe.
TerraUSD is an algorithmically developed stablecoin that uses a sophisticated method with a related sister cryptocurrency named Luna to keep the same value as USD. It’s worth noting that the developers of Luna and Terra are the same. The Luna supply pool adds and subtracts from Terra’s supply to keep the price stable. Users then burn (sell) Luna in order to mint Terra, and even Terra in order to mint Luna. All of this is accomplished by a blockchain-developed algorithmic module.
For example, if the price of a Terra currency drops to $0.80, and you can swap $1 worth of Terra for $1 Luna, astute investors can immediately make a 20 cent profit by burning their TerraUSD.
Why did the balancing act between TerraUSD and Luna Crypto break?
Terra and Luna’s entire concept is centered on supply and demand. For investors to register minor cuts but stable profits, this balancing was required. The balancing act between TerraUSD and Luna, however, broke down last week. Terra was mostly held together by something known as Anchor Protocol. Consider the Anchor Protocol to be your savings account. For depositing their token in the Anchor protocol, every Terra holder received a 20% interest payment.
People have been receiving 20 percent fixed interest from Anchor accounts for several months. Almost 75% of the total Terra circulation was put in Anchor, according to Coindesk.
However, over the weekend, huge quantities of TerraUSD were abruptly withdrawn from Anchor on the basis of a rumor that Terra was switching from a fixed rate of 20% interest to a variable one. Investors became concerned, and they began selling Terra tokens and exchanging them for other stablecoins.
People have been swapping TerraUSD for Luna in large numbers. Luna’s supply eventually increased, and its price dropped. The balancing process broke down as more people dumped the Terra coin, and both the Terra and Luna crypto coins crashed. The Terra coin price plunged to a stunning 0.225 on May 11, according to Coinmarketcap, suggesting that what was supposed to be a stablecoin lost about 80% of its value in just a few days.
Impact of Terra fall on Crypto crash
The impact of Terra’s decline on the cryptocurrency market
Fear is the primary driver of adverse sentiment in the cryptocurrency market. As Terra plummeted, crypto investors panicked and began selling other coins, causing the crypto market to implode. On Thursday, the world’s largest cryptocurrency, Bitcoin, fell to $25,400. However, it has shown only sporadic signs of stability since then. The whole crypto sector now has a market capitalization of $1.2 trillion, down from $2.9 trillion in November 2021, according to Coinmarketcap.
The price of the coin has dropped from $116 in April to a fraction of a penny as of this writing. Small-cap memecoins have witnessed similar collapses in the past, but never for a currency the scale of the moon, which had a market cap of over $40 billion just last month.
Mike Boroughs, the co-founder of crypto investing firm Fortis Digital, stated, “This is momentous for the crypto markets.” “Because of its size and significance in terms of the number of people who lost significant value, this is a defining event for the space.”
Why was Terra blockchain halted?
After Terra’s price dropped, the Terra blockchain was halted for nearly nine hours. No new blocks were generated on the blockchain network during the pause. Terra token holders couldn’t move their assets until the blockchain was unfrozen. “After substantial $LUNA inflation and a significantly reduced cost of attack, Terra validators have opted to pause the Terra chain to avoid governance attacks,” the business tweeted.
Following Terra’s price drop, a report from blockchain firm Elliptic revealed that at least $3.5 billion in Bitcoin was untraceable. According to Bloomberg, the Terra blockchain developers established the Luna Foundation Guard (LFG) to buy $3.5 billion in Bitcoin in order to buy Terra and maintain the one-to-one peg with the dollar. However, according to the article, the money has already been depleted. On May 9, two transactions totaling $1.7 billion were transmitted from LFG wallets to a new address. The entire sum was transferred to a Gemini crypto exchange in a matter of hours.