The absolute meltdown that is Terra Luna

Terra's UST, the third-largest stablecoin by market cap, is a decentralized algorithmic stablecoin that doesn't have dollars (or other assets) backing it like USDT or USDC do. Instead, its pegged via smart contracts that mints-and-burns between LUNA and UST. Swap one UST for $1 of LUNA; the UST swapped for LUNA is destroyed and removed; or when LUNA is swapped for UST - the LUNA is destroyed.

But yesterday (Monday May 9th 2022), UST dropped from its $1 peg to $0.69. Traders can no longer redeem their $1 of UST for $1 of LUNA. Terra-Luna Foundation Guard (LFG) even rushed a $1.5 billion loan to prop up the peg, but failed.

Since May 3, LFG has stockpiled almost $4 billion worth of Bitcoin, Avalanche, UST, and LUNA in its reserves to back up its dollar peg just in case the algorithm stopped working – like yesterday - when the peg went to $0.985 last weekend, LFG voted to lend out $750 million in Bitcoin and $750 million in UST to "proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets." – BUT IT DIDN’T WORK.

Do Kwon, co-founder of Terraform, who popularized the Luna token and Terra stablecoin, tweeted "Deploying more capital—steady lads."

Stablecoin? I think not. Terra LUNA has dropped by 53%, returning to September 2021 prices. Investor confidence in the protocol is dying FAST. With a shattered dollar peg, LUNA continues to sink. The UST peg hit a ‘high’ recently of only of $0.8486-$.91

Anchor Protocol (a lending and borrowing protocol that provides crypto natives, fintech companies, and investors a stable high interest rate, offering up to 19.5% APY) saw its total value locked fall 49.1% down to only $7.16bn. Investors Fled Terra’s Anchor as UST Stablecoin Repeatedly Lost its $1 Peg

LUNA now needs to climb back through its new levels of resistance;

First Major Resistance Level at $53.73.

Second Major Resistance Level at $77.28

Third Major Resistance Level sits at $112.86

Binance announced that withdrawals for LUNA and UST have been “temporarily suspended”.

This is not good. It has since resumed the service, but it was suspended for 6+hours. Binance said it would continue to monitor network conditions. The token wiped out $11 billion over the last 24 hours alone. It is down 75% from its all-time high of $119.18 in April.

There is currently no link between the reserves and Terra's on-chain mint-burn-mechanism. It is also unclear if this will EVER be possible again because the reserves look to be drained almost entirely. Terra’s $1.3 bin in BTC reserves are practically empty.

Bloomberg wrote today (May 10th) “Crypto’s Audacious Algorithmic Stablecoin Experiment Crumbles”

This isn’t the first time TerraUSD depegged from $1, but it is the most high-profile incident - people are saying it is also partly to blame for the Bitcoin price plunge, as BTC has hit yearly lows.

For the foreseeable future - the crypto ecosystem looks to be on very very thin ice.

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