The Terror in Terra Luna's Fiasco

Volatile. That terrible word does not even begin to describe what happened to the cryptoverse these past few days and even weeks. It hasn't really been a good month for the cryptoverse. Bitcoin fell below $30K which is more than -50% against its all-time-high which was near $60K and almost every single coin in the market followed suit. No doubt that the bear has entered its hibernation period.

Although some bear market bounces are expected to be seen, according to experts, we should really not get our hopes up about seeing any real significant uptrend any time soon. How deeper this dive goes remains to be seen as well. So hold on tight and fasten everything that can be fastened because it's going to be one hell of a ride, or you can always cash out and avoid all the stress that's going to befall upon all of us.

And that's what a lot of people are regretting now. A lot of people are wishing that they should have cashed out earlier even at a significant loss instead of watching their assets go down in flames, up in flames? Whatever it is, some people really watched in terror as their asset's value plummet to the ground overnight. And yes, I am talking about Terra (Luna) and TerraUSD (UST)'s fiasco.

Terraform Labs

Luna and UST are both brought to us by the same people from Terraform Labs. Luna is their reserve currency and UST is their Stablecoin.

Luna, which soared at around $80 at one time last week fell to $0.000000999967 on May 13, 2022. That was a lot of zeroes and yes, it really came that close to ZERO.

While its Stablecoin counterpart UST which was supposed to be a Stablecoin pegged to the US Dollar broke its peg and fell down to $0.044951987705 on May 13, 2022. I guess it is safe to say that it isn't as Stable as they claimed it to be. And again, this Stablecoin is supposed to be like USDt or USDC that is valued in equivalence to 1 US Dollar.

Unlike USDt or USDC, UST isn't backed by any real-world asset, actually, it isn't backed by any asset, it is an algorithmic Stablecoin. And as I have read and covered before, an algorithmic Stablecoin relies purely on "smart contracts" or programs embedded on the blockchain to derive its price and value. It maintains its value pegged to $1 by burning and minting supply as needed. When the price goes higher, it mints and dilutes the market with new supply to bring the price back down, and when the price goes a tad lower than a dollar, it should automatically burn a significant amount of coins to drive the price back up.

So what happened to these sister coins?

Prior to the crash, Luna has only about 380 million coins in total supply, and I am not sure if it was the start of the meltdown but its supply ballooned to about 6.5 trillion coins. This prompted big exchanges like Binance to delist both tokens from trading platforms. That means as people watch the price falls down faster than the apple from the tree, they couldn't do anything about it since they couldn't sell their holdings. And all of these happened overnight, if you were asleep at that time, then you would wake up to a nightmare.

People were reporting losses that could feed a family for a year, some even reported the loss of their entire savings plus their house. I don't know about you but this really seemed like a Ponzi scheme in its end game. However, the persons responsible for both coins tried to assure the public and the investors that this is just a temporary setback for their ecosystem, according to them, they are working fervently to reconstitute the blockchain and restore the confidence of the people. And dare I say, it's mission impossible, or maybe improbable? Whatever it is, it will be certainly true that they will be under the microscope and everyone's eyes will be glued to what they do next. Also according to them, they are trying to raise $1B to pay out their investors.

Currently, the trading of LUNA and UST are resumed on Binance.

That may be the first step toward a better day but then again, there's a long way to recovery. But who knows right? If they can fall like that overnight, who's to say that they can't go to the moon overnight too?

Conclusion

This LUNA meltdown surely adds to the fear, uncertainty, and doubts surrounding the cryptoverse nowadays. While many people flock to the exchanges to buy the "dip" on this LUNA ecosystem, I would not like to add to my worries and will stick to my BCH holdings.

Another thing that this crash exposed is how algorithmic stablecoins are not yet fully equipped to handle the challenges that the cryptoverse offers. It just shows that they aren't stable to be the best version of Stablecoins. Unlike traditional-collateralized Stablecoins like USDC and USDt, UST couldn't sell any reserve to cover up the losses since they have no reserve in the first place.

Of course, nothing mentioned here is a piece of financial advice, always DYOR.

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Series    : All About Crypto
Title     : The Terror in Terra Luna's Fiasco
Published : 16-May-2022
Author :  © RB

References:

Chau, D. (2022, May 13). “Evil genius” may have caused Terra and Luna cryptocurrencies to crash in a “death spiral.” ABC News. Retrieved May 14, 2022, from https://www.abc.net.au/news/2022-05-13/bitcoin-crypto-terra-ust-luna-stablecoin-evil-genius-plot/101062388

Pimentel, B. (2022, May 13). The UST crash is destabilizing crypto. Protocol. Retrieved May 14, 2022, from https://www.protocol.com/fintech/terra-luna-ust-stablecoin-crash

Doyle, L. (2022, May 14). Terra Luna: What happened to LUNA? Will it bounce back? Express.Co.Uk. Retrieved May 14, 2022, from https://www.express.co.uk/finance/city/1609609/Terra-Luna-what-happened-cryptocurrency-crash-evg

Cuthbertson, A. (2022, May 13). ‘I lost my life savings’: Terra Luna cryptocurrency collapses 98% overnight. The Independent. Retrieved May 14, 2022, from https://www.independent.co.uk/tech/terra-luna-ust-crypto-price-crash-b2076655.html

Kharpal, A., & Browne, R. (2022, May 14). Cryptocurrency luna crashes to $0 as UST falls further from dollar peg. CNBC. Retrieved May 14, 2022, from https://www.cnbc.com/2022/05/13/cryptocurrency-luna-crashes-to-0-as-ust-falls-from-peg-bitcoin-rises.html

TechCrunch is part of the Yahoo family of brands. (2022, May 12). TechCrunch. Retrieved May 14, 2022, from https://techcrunch.com/2022/05/12/binance-halts-luna-and-ust-trading-across-most-of-its-spot-pairs-following-meltdown/