Understanding TerraUSD & LUNA Crash
I'm always curious how TerraUSD crashed and how it was de-pegged in dollar when it should be “stablecoin” which means it's price doesn't fluctuate much and always close to $1 price turns out to be not so stable at all.
The de-pegged scenario happens in TerraUSD ($UST) created a mess in crypto market in general, causing extreme fear for investors especially those who invested in $LUNA which is the sister coin of TerraUSD as it was pawned to save the TerraUSD position in the market.
With that, I was curious how it happens and did my research to understand the scenario properly. So here's what I've learned upon my research..
Two types of Stablecoin
There are two type of stablecoins, and as we immerse ourselves in crypto we must understand these two types for us to know what stablecoin should we used if ever we like to hedge our funds against the crypto market volatility.
Centralized Stablecoin
Centralized stablecoins are the one that was backed by dollar physically. It has dollar reserved in banks.
These are the USDT and USDC, which means they have reserve of U.S dollars in the banks as collateral backing the cryptocurrency value.
When you say centralized it involves third party which is the banks. This is why others that doesn't prefer centralized as they patronize decentralized asset doesn't use USDT and USDC.
(Some doesn't like centralized stablecoins especially USDT as it has already a shady past when it keeps on printing but the actual amount is not equal on their treasury. If USDT creators runs with all the money they had they can do it.)
Algorithmic Stablecoins
Algorithmic stablecoins are the decentralized stablecoin, but it doesn't have physical value like centralized stablecoins that is why it needs to be backed by other digital assets to maintain it's dollar pegged.
As it doesn't have real world equivalents, they're backed by digital assets held in smart contracts on the blockchain.
It also appears that algorithmic stablecoin are still an experimental, that is why investors should know how risky it is to invest in it.
How did TerraUSD Crash?
TerraUSD crash can be compared to a bank run in traditional financial world that suddenly happens in digital world. Just like in traditional banks, all money deposited are not around physically as they're using it for other purposes such as giving loans to creditor, business expansion and etc.
When all people demand to withdraw their money, banks will likely collapse as they cannot meet the demand, same thing happened with UST they didn't manage to cater the withdrawal demands or selling pressure caused by the panicked investors increasing the odds that it fails to maintain it's pegged to the dollar.
Some massive withdrawals of the coin from a crypto exchange happens last week, it's in Binance probably that made a speculation of a run on the coin, with that most traders added on selling pressures to flee from the asset due to FUD.
The supply and demand balance was upset and made TerraUSD broke its dollar peg.
Why did $LUNA crashed badly after TerraUSD crash?
$LUNA is the sister coin of $UST, as it is said that $UST is an algorithmic stablecoin which means it doesn't have any reserve dollar physically so it needs to be backed by other digital assets and LUNA is the one being backed by UST. Terra also added some Bitcoin in their treasury..
In attempting to save the $UST position in the market $LUNA has been burned as well as the Bitcoin they held in their treasury to boost UST price as it drops badly. While it hurts LUNA price causing it almost went to zero.
When TerraUSD value drops badly holders should burn their coin to take out from circulation and in exchange they'll get new coin which is the LUNA. In attempting to raise UST price back to it's dollar peg, Terra has to keep minting LUNA and that will be added on LUNA's supply.
With TerraUSD and LUNA crashed, it shakes the crypto market as they also sold their Bitcoin holdings that cause panic sellers panic thinking big entities are now exiting in the market.
But yesterday LUNA pumps up to 6,000% which means it's trying it's best to rise up from the ashes. As of writing this article it's still in green, if I'm not mistaken the price drops to $0.000001 per LUNA which is very insane drops in the entire crypto history considering it was on top 10 on the last 7 days.
While TerraUSD is still trading below $.20, still unable to regain it peg.
But surely both of the coins will not be back to where it is before, some are claiming it's a ponzi scheme I am not sure of that either but who knows.
Source: globalnews-ca.cdn.ampproject.org
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Date Published: May 15,2022
Nahilo ako dun ah... Dami ko pa talaga Hindi alam sa cryptoverse. Ahuhu
But isa lang alam ko dapat kapag naginvest ka alam mo lahat ng risk associated sa investments mo