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Luna Cryptocurrency Plummets - Why It Matters?

The Luna cryptocurrency plummets based on recent reports. The so-called stablecoin TerraUSD (UST) was unpegged on May 9, 2018, after nearly 18 months of maintaining a value that was consistent with its value in relation to the US dollar. The uncoupling set off a chain of events that ultimately resulted in the collapse of not only UST and the cryptocurrency known as Terra (LUNA), but also had a role in bitcoin and the larger cryptocurrency market experiencing a significant decline from which they have not yet fully recovered.

Luna Cryptocurrency (Terra)

An animated Terra Luna Logo
An animated Terra Luna Logo

A blockchain technology and payment platform called Terra is being developed for use with algorithmic stablecoins. In 2018, Do Kwon and Daniel Shin, co-founders of the business Terraform Labs, were responsible for the creation of the project. The Terra stablecoin and the Luna reserve asset cryptocurrency that goes along with it are its most well-known products. Terra is an umbrella brand for a family of algorithmic stablecoins, each of which is named for the currency to which it is tethered. For instance, TerraUSD (UST) is tied to the value of the United States dollar. Luna is the major underpinning asset for Terra, and it is also utilized as a governance token for users to vote on different ideas brought forward by the Terra community. The UST stablecoins were not backed by U.S. dollars; rather, they were supposed to maintain their peg using a complicated formula that is known as a "burn and mint equilibrium." This approach makes use of a two-token system, with one token (UST) designed to maintain its stability and the second token (LUNA) intended to absorb any volatility that may arise.

The Terra chain provided the foundation for the lending and borrowing mechanism known as the Anchor Protocol. Investors who placed UST in the Anchor Protocol were eligible for a return of around 19 percent, which was paid out of Terra's reserves. Because the Anchor Protocol has such a high-yielding mechanism, some detractors have expressed worry that Kwon's model for stablecoins could operate in a manner analogous to that of a "gigantic Ponzi scam." Another project that was built on the Terra chain was called Mirror Protocol. This project aimed to construct and offer financial derivatives that practically "mirrored" genuine listed equities in the market.

The Ongoing Issue

It has become the topic of much speculation as to what actually caused UST to lose its peg in the first place; one common conspiracy theory suggests that someone deliberately dumped $350 million worth of UST; however, this claim is not supported by any evidence. If LFG did this, it would be obliged to sell its bitcoin, which would result in the price of bitcoin going down. Holding short positions on Bitcoin could be profitable for anyone who is successful in achieving the goal stated above.

The price of the coin dropped from $116 in April all the way down to just one penny on Thursday. It has decreased much more, and over the weekend it was trading for a fraction of a cent. As this is being written, one luna is worth approximately one eighth of a penny. An implosion of this kind has occurred in the past for small-cap memecoins, but it has never occurred for something as large as luna, which just one month ago had a market cap of more over $40 billion.

TerraUSD (UST), a cryptocurrency that is known as a stablecoin because its value is meant to remain at $1, is no longer trading at $1, in case you were somehow unaware of this fact. When something is advertised to cost one dollar but actually costs more, the situation is almost never favorable. In addition to this, the value of the crypto coin known as LUNA, which is used to back UST, has practically completely vanished. Because of the amount of coverage that has been given to these losses, it is highly likely that this is the umpteen millionth piece that you have read about UST.

The Story Behind Luna's Decline

Terra LUNA logo with a man holding a tablet
Terra LUNA logo with a man holding a tablet

It all began on the morning of Saturday, May 7th. Over two billion dollars worth of UST was unstaked, which means it was removed from the Anchor Protocol, and immediately afterward, hundreds of millions of dollars worth of it was sold. The question of whether this was a reaction to a particularly tumultuous moment — the increase in interest rates having a particularly negative effect on cryptocurrency prices — or a more malicious attack on Terra's system is one that is still being discussed at length.

The price dropped to 91 cents as a result of such massive sales. Traders attempted to take advantage of an arbitrage opportunity by swapping $1 worth of luna for 90 cents worth of UST; however, a roadblock occurred at that moment. There is a daily limit on $100 million worth of UST that can be burned for luna.

After the stablecoin failed to maintain its peg, investors, who were already skittish due to the bearish state of the market, rushed to unload their UST holdings. It fluctuated between 30 and 50 cents in the week that followed the initial depeg, but it has now settled at a low of less than 20 cents and is expected to continue falling. Its marketcap has dropped from over $18 billion at the beginning of May to its current level of $2 billion.

Why Does This Matter?

Terra Luna Logo with some red arrows going down
Terra Luna Logo with some red arrows going down

At least $15 billion worth of cryptocurrency has been lost as a result of Luna and UST alone. Self-harm has been reported by persons who lost a significant amount of money when UST collapsed, albeit these stories cannot be corroborated. Despite this, it is apparent that many people lost a significant amount of money when the company went under. Fortis Digital's Boroughs points out that the devastation isn't limited to Terra's ecosystem. Those who had invested in UST and luna were forced to sell large portions of their crypto holdings in order to recuperate some of the losses, which dragged down the entire market.

Second, it raises issues about the stability of other stablecoins, such as Bitcoin. In contrast to tether and USDC, UST was an algorithmic stablecoin. A year ago, New York Attorney General Eric Schneiderman accused tether of deceiving the public about how much money it had stashed away in dollars.

The Possible Future Of Terra Luna

For all practical purposes, it is worthless, but UST's downfall saw its value plummet below $0.10. LUNA's value plummeted from over $110 to less than one ten thousandth of a cent as a result of the crash. They lost a combined total of $60 billion as a result of the sell-off.

Bitcoin and Ethereum (ETH) are currently trading near 18-month lows, indicating that the market's faith has been shaken. When a pandemic-induced sell-off dropped the price of bitcoin below $5,000 in March 2020, the Crypto Fear & Greed Index, one gauge of market emotion, was at its lowest level.

What Do Kwon, Terraform Labs founder and CEO, believes are the "optimal stages" for LUNA's revival have been laid out by Terraform Labs in an interview. A hard fork is part of the plan, but the Terra community will have to agree to it in order for it to work.

People Also Ask

What Is Terra Luna Coin?

Luna is the Terra protocol's staking currency, which absorbs the price volatility of Terra stablecoins. It is used for governance and mining. Users stake Luna to Terra blockchain miners (dubbed "validators"), who record and verify transactions on the blockchain and are compensated with transaction fees.

Is Terra And Luna The Same?

The old blockchain will be known as Terra Classic (LUNC), and the new blockchain will be known as Terra (LUNA), according to the company's tweet. The Luna token is new and should not be confused with the previous one with the same name.

What Is Happening With Terra Luna?

Several crypto exchanges, including Binance and Coinbase, have blacklisted Terra-Luna currencies following the massive loss investors experienced when the supply-demand ratio of the algorithmically built stablecoins crashed.

Conclusion

Do Kwon suggested a solution to Luna's problems on Friday. The Terralabs CEO proposed forking Terra, which would result in the creation of a new blockchain. A snapshot of current Luna and UST holders would be obtained, and 900 million Luna tokens would be issued, with the remaining 100 million going to a "community pool to support future improvements." In essence, it is an attempt to restore the blockchain to its pre-depegging condition. Many people, including some specialists, are doubtful of the plan's success.

About The Authors

Velma Battle

Velma Battle - Travelling Expert

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