terra luna crash

Terra LUNA Crash – A Nightmare for Crypto Investors

May 13, 2022

Why Terra LUNA is going Down?

Will Terra LUNA Recover?

These are the two most common questions people are talking about in the crypto community. It’s not the first time that a cryptocurrency has crashed so badly. But Luna’s case is a bit different.

Luna Was Supposed to Be a Fundamentally Strong Project

Crypto is an unregulated market where the risks of scams are too high. Over the years, many inexperienced investors have lost millions of dollars by investing in different crypto projects without knowing any details.

Luna, on the other hand, had a community of experienced investors who invest their money after some research. A week ago LUNA was ranked among the top 10 cryptocurrencies in terms of market cap. But now, it has collapsed and it’s not even worth a penny anymore.

The investors have lost billions of dollars within a few days and some anecdotal reports of self-harm are reported because people had invested their life savings in this project. Some people claim that it was an organized scam planned over a long time while others believe that the company itself got scammed by a group of people.

How did Terra Luna Work?

Terra introduced the concept of algorithmic stablecoins where the value of a coin is kept constant through another crypto token and smart contracts. TerraUSD (UST) was the stablecoin of Terra that was pegged at $1. The value of UST was maintained by burning LUNA tokens.

Other stablecoins like USDT, BUSD, and DAI are backed by physical assets that can be used as collateral. But UST was a more decentralized solution as it was backed by another cryptocurrency called LUNA.

The price of UST was pegged at $1. So, the arbitrageurs helped with maintaining the value. The arbitrageurs used to buy the UST tokens whenever its price dropped below $1. And they used to convert their UST tokens into LUNA tokens whenever the UST’s price raised above $1.

So, if the UST’s price is at $1, the arbitrageur needs to burn $100 worth of LUNA tokens to mint 100 UST tokens but if the UST’s price is at $0.98, the arbitrageur can get 100 UST tokens by burning $98 worth of LUNA tokens. And they can convert the UST into LUNA once the UST’s price is at $1.

Thus, they can generate a $2 profit from this trade. And the profit may increase depending on the size of the trade. Similarly, the arbitrageurs could mint LUNA tokens by burning UST if the UST’s price is above $1.

We invite you to read our detailed guide about Terra LUNA if you need more information about how Terra Luna Worked.

How Terra Luna Became Popular?

Introducing an algorithmic stablecoin was a major reason why Terra became popular. It enabled users to transfer funds globally with a very reasonable fee. It worked as a bridge between fiat currencies and cryptocurrencies allowing users to buy/sell cryptocurrencies smoothly.

Furthermore, it was the second most popular smart contract building platform after Ethereum. The users could generate smart contracts on this platform by burning Luna Tokens. Similarly, the developers could build apps and other tokens on this network.

Why did Terra LUNA Token Crash?

UST had a total market cap of $15-16 billion before it all began. At the beginning of the week, around $2 billion worth of UST tokens were unstaked from the network and they were immediately sold in the market due to which the UST was depegged and its price dropped $0.90-$0.91 cent.

The arbitrageurs started taking advantage of the opportunity by converting their UST tokens into Luna to generate some profits. It ultimately created panic leading to a mass selling of UST tokens. The problem is that the users could only burn $100 million worth of UST for Luna tokens per day.

So, the holders started exchanging UST for other stablecoins because there wasn’t any other solution. The company started selling its reserve of Bitcoin to stabilize the UST token but it couldn’t support the sell-off. The Luna token holders also panicked when they saw such a huge decline in the price of the stablecoin.

The organization also minted a huge amount of LUNA tokens to protect the value of their Stablecoin (UST). But it didn’t work and created a gap between supply and demand due to which the price of LUNA token declined even further. And the Luna token that was trading at $85 at the beginning of the week is not even worth a penny anymore.

Who Caused the Terra LUNA Token Crash?

Some people claim that a group of people intentionally played this trick to manipulate the price of Bitcoin. Terra organization had a huge amount of Bitcoin reserves that they intended to use to stabilize the UST token. The manipulators knew that the organization will sell its Bitcoin reserves to tackle the huge sell-off. But these are just claims and there isn’t any solid evidence.

However, it’s one of the major reasons why Bitcoin’s price declined during this week.

When will LUNA Recover?

Do Kwon, the founder of Terra Foundation, has announced that they’re working on fixing this issue and they’ve requested the holders to be patient. But the miners have agreed upon halting the operations of the Terra network to prevent the governance attacks. The withdrawal requests are also stopped by several exchanges to handle this situation.

According to the current situation, the Luna token may take some time to recover.

Conclusion

LUNA token was one of the top 10 cryptocurrencies almost a week ago but it’s not even worth a penny anymore. It was best known for its algorithmic stablecoin UST (TerraUSD). But the stablecoin has also lost its value in the current situation. The Terra Organization is trying to resolve the problem. So, many investors are still hopeful that it may recover over time.

But at the same time, it’s quite alarming for those who have invested in other crypto projects.

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