It may have been one of the most extraordinary chapters in the history of the cryptocurrencies industry. The Amazing Demise of Terra (LUNA) and the UST stablecoin will be discussed as a historic moment for a long time to come. In this article, we briefly look back at how one of the largest crypto in the world could go down so hard.
Just a week ago, Terra was a heavyweight in the world of crypto† It stood proudly in the top 10 largest cryptocurrencies and LUNA traded at around $85. Just 48 hours later, LUNA’s value had evaporated and was worth nearly $0. Terra’s stablecoin, TerraUSD (UST), has also completely gone down. After UST de pegor peg, with the US dollar lost, the exchange rate collapsed in an instant all the way to less than 10 dollar cents.
The big question, of course, is how a project of the size and status of Terra could have collapsed like a house of cards. This demise has most likely been due in large part to the way the Terra ecosystem works.
UST is (or was) a so-called algorithmic stablecoin† How this works exactly can best be explained by an example from practice. For example, if the value of UST is $1.01, users are incentivized to use Terra’s trading module to exchange $1.00 worth of LUNA for 1 UST, making a net profit of $0.01.
Now when the tables are turned and the UST drops to $0.99, network users can do the exact opposite, with the protocol prohibiting some users from exchanging $1.00 in UST for $1.00 in LUNA. To maintain the value of UST, the LUNA pool she takes or withdraws her coffers, so customers have to burn LUNA to mint UST and vice versa. This system eventually resulted in a vicious circle being set in motion from which an escape proved impossible.
The founder of Terra, Do Kwon, has tried unsuccessfully several times to pull the network out of the vicious circle and desperately looked for ways to stabilize the network. In the meantime, of course, we know that this was not successful. Also the reserve that the Luna Foundation Guard had built was not sufficient to deal with the major problems. It is currently unclear what happened to this bitcoin (BTC).
Most major exchanges suspended LUNA and UST trading. From that moment on, investors spoke of a “dead project”. However, there are still some signs of life. Bitvavo resumed this morning trade in LUNA again. Whether Terra can ever make a serious recovery remains to be seen.