Luna – What Happened To The Luna Crypto Coin?

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Luna – What Happened To The Luna Crypto Coin?

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TerraUSD (UST) and its sister coin Luna were trading at $1.00 and $86.14, respectively, on May 5, 2022. However, at the close of business on Friday, May 13, 2022, Terra(UST) was trading at $0.15, while the worst hit, Luna, was trading at $0.00002.

To make matters worse, the Terra network has been shut down to prevent further disaster. It is only natural therefore to ask: Why has luna crashed so much? Is luna gone? Can it recover?

What is Terra Luna Crypto And How Does It Work?

Terra is a blockchain that allows users to create fiat-pegged stablecoins. TerraUSD or UST and Luna are the two cryptocurrencies that power the Terra blockchain. TerraUSD (UST), for example, is linked to the US dollar. And Luna is used to absorb the price volatility of stablecoins.

Consider the entire Terra economy to be divided into two pools: one for Terra and one for Luna. The Luna supply pool adds to or subtracts from Terra’s supply to keep the price stable. Users can burn Luna to mint Terra and Terra to mint Luna. When Terra’s price is high in relation to its peg, the protocol encourages users to burn Luna and mint Terra.

Terra’s new supply expands its pool, balancing supply and demand. Users mint more Terra from burned Luna until the target price of Terra is reached. The Luna pool shrinks as a result of this process, raising the price of Luna.

Similarly, when the price of Terra falls below its peg, the protocol encourages users to burn Terra and mint Luna. Scarcity results from a decrease in Terra supply, and the price of Terra rises. More Luna is minted from burned Terra until the target price of Terra is reached. The price of the Luna pool fluctuates.

For example, if 1 UST is trading at 1.03 USD, users can use Terra Station’s market swap feature to exchange 1 USD of Luna for 1 UST. The market burns one USD of Luna and creates one UST. Users can then sell their 1 UST for 1.03 USD, profiting.03 USD from arbitrage and contributing to the UST pool. This arbitrage will continue until the UST price falls back to match the USD price, preserving Terra’s peg.

Thus, the Terra algorithm allows users to always trade 1 USD worth of Luna for 1 UST, and vice versa, while keeping the Terra price stable. Terra’s price stability is achieved by incentivizing the minting or burning of Terra via arbitrage opportunities.

Successes Recorded By The Terra network

Founded in 2018 by Do Kwon and Daniel Shin of Terraform labs (a Singapore-based tech firm), Terra became the second-largest blockchain for decentralized finance (DeFi) protocols in terms of total value locked (TVL) in December 2022. This was no small feat considering that it knocked Binace Smart Chain (BSC) off that position and was second only to Etherium. 

On Terra, 13 projects locked over $18.2 billion in value, averaging over $1.4 billion per protocol, compared to $73 million per protocol on BSC, which has $16.5 billion locked on 225 protocols.

The total value of the Terra protocol has increased from $18.2 billion at the start of 2022 to $25.58 billion as of March 9, the highest level to date.

Among the notable projects built on the Terra network are: Anchor, a lending protocol on Terra; Lido, a staking protocol that allows you to spend staked assets; and Astroport, an automated market maker for Terra tokens.

From a relatively unknown coin worth $1.29 in late July 2019, LUNA – Terra’s digital token maintained a sideways rally for the majority of the year. However, following a broader market consolidation, Luna’s price skyrocketed into the spotlight in the second half of 2021, increasing by over 1,000 percent from $0.1 to $21.4.

Following some minor corrections, the coin fell to $5.95 in July 2021 before rallying to a 52-week high of $99.72 in late December 2021 the Terra Luna coin reached its all-time high of $119.18 on April 5, 2022.  

So What Really Happened to Terra(UST) and Luna Coin? 

A number of reasons have been suggested as responsible for the crash of the Luna coin. 

Luna-crash-cryptofinancegist

Luna crash

Bearish sentiment in the cryptocurrency market

Since early November, the cryptocurrency market has lost more than $1 trillion in market value. According to CoinMarketCap, more than $200 billion was lost in just 24 hours.  The total market capitalization of all cryptocurrencies has fallen to around $1.7 trillion, down from nearly $3 trillion in early November. 

Bitcoin prices have also dropped below $36,000, losing nearly half their value since early November 2021, when they peaked at more than $67,000.

Ethereum, the second-largest cryptocurrency by market capitalization, is currently trading at $2,033.55, a 41.6 percent drop from its all-time high of $4,878.26 on Nov. 10.

Companies with high exposure to cryptocurrency were not spared. For example, Coinbase fell about 13% during regular trading and continued to fall after hours, while Robinhood fell more than 5%.

Most cryptocurrencies followed suit, plummeting after reaching all-time highs in early November 2021.

This general outlook is thus cited as a major reason for Luna’s eventual fall.

The Fed’s interest rate hike and concerns about stable coins

The Federal Reserve raised interest rates by half a percentage point last week, prompting a stock market crash. Crypto markets have followed suit, losing more than 10%, or nearly $200 billion, in the last week.

Riskier assets around the world have suffered as the Federal Reserve prepares to withdraw stimulus from the market. Bitcoin, the most valuable digital asset, fell more than 12% and fell below $36,000 for the first time since July 2021. It has lost more than 45 percent of its value since its all-time high in November. Other digital currencies have suffered just as much, if not more, with Ether and meme coins seeing similar drops.

The UST token’s pricing structure,

Many critics point to Terra’s algorithmic stablecoin structure and UST’s rapid growth, which appeared to be unsupported by sufficient funds.

UST is classified as an algorithmic stablecoin, which means that its $1 peg is supposed to be governed by underlying code and has no reserves to back it up. This distinguishes it from other stablecoins such as tether and USDC, which are backed by real-world assets such as bonds. UST has no physical reserves.

Extreme market volatility has put UST to the test, and it has failed to keep the peg. The Terra blockchain, which underpins UST and luna, has stopped processing transactions twice in less than 24 hours, adding to the complications. The staking platform Anchor is also a problem, in addition to the algorithm.

Anchor is a platform that pays people 20% for staking their UST. That’s insane cash. As a result, when people buy UST, they immediately deposit it on Anchor. As a result, the anchor platform received 75 percent of the UST supply ($14 billion).

However, deposits dropped to $3 billion on Saturday. People stopped staking UST, which caused so much panic that people began to sell off their Luna.

Anchor-on-terra

Anchor-on-terra

An attack on the Luna coin and the Terra network 

A recent Twitter thread with over 9,000 retweets and 31,000 likes claims that one cryptocurrency wallet dumped $350 million worth of UST in an attempt to crash the stablecoin under $1, requiring the LFG to sell its Bitcoin reserves in order to maintain the peg.

According to the thread, the alleged attacker had a large Bitcoin short position and wanted to drive down the price of Bitcoin. The attacker would cause panic by selling whale-size UST holdings, forcing the LFG to sell its Bitcoin to save UST and tanking the cryptocurrency’s price. As events progressed, the thread estimated that the hacker made a profit of over $800 million.

The crash of Luna cryptocurrency could be caused by a combination of the above assumptions. Whatever the case may be, the TerraUSD(UST) and Luna crashes came as a shock to many, and billions of dollars were lost in the process.

Where Are We Now?

As of this writing, both currencies have reached an all-time low since their inception. The Terra network has been paused. Luna was temporarily delisted from major exchanges like Binance which affected investors’ confidence. To top it all off, investors have lost billions of dollars as a result of Terra/Luna’s sharp decline in fortune.

It appears though that the network’s worst days are behind it. However, some questions remain unanswered.

 Is Luna gone or is it a buy? Can it recover?

Terraform Labs (TFL) — the organization behind UST, cryptocurrency Terra (LUNA) and Luna Foundation Guard (LFG) twitted an update on the situation and the efforts been made to stabilize the situation. 

“I understand the last 72 hours have been extremely tough on all of you — know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” Do Kwon the founder said.

LFG is looking to raise over $1 billion from investment firms and market makers.

As of 10:30 a.m. ET Friday 13th May 2022, trading in UST and luna had resumed on Binance.

Conclusion

LUNA and UST may have had an impact on the price of Bitcoin and the cryptocurrency market in general. The market may appear crazy right now, but it always recovers, even if some cryptocurrencies fail. People panicking and selling their crypto cause price drops in situations like this. However, this does not imply that the entire market will collapse.

Purchasing Luna now, on the other hand, is a risky venture. While interest was still high prior to Binance Futures’ decision to delist margin trading during the Luna crash,  it would be wise to ‘wait for confirmation’ and a strong bounce that holds before investing again.

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