Are you still trying to process the recent May 11th crypto crash or simply want to know what’s going on with Terra (LUNA), keep on reading.
You’ll find all the information about LUNA, what it is, how does it work, as well as the details of its recent extreme crash, theories as to what happened, and the possible future of Terra LUNA.
LUNA ATH – $119.18 (reached on April 5th, 2022)
LUNA CURRENT PRICE – $0.00025 (date: 15.05.2022, source: https://coinmarketcap.com/pl/currencies/terra-luna/)
What is LUNA crypto
LUNA is a cryptocurrency operating on the Terra blockchain that was developed by Terraform Labs – a Singapore-based company of which Do Kwon is the CEO of.
Launched in 2019, LUNA is a network token of Terra and came out to be the most important currency within that ecosystem.
LUNA helped keep the value of UST at the desired $1 to maintain the title of UST as a stablecoin, which is serving as an alternative to more volatile cryptocurrencies.
A stablecoin is linked or pegged to another financial medium, such as fiat money, e.g., the US Dollar, or a commodity, such as gold, helping it remain stable.
LUNA, created to help maintain the UST value, was crucial to the whole ecosystem since UST was pegged to the USD Dollar.
Until its recent crash that occurred on May 11th, LUNA was quite successful, easily finding its place on the top 10 in terms of its market cap.
So, the next logical question would be – what happened to such successful project, especially if there were no technical difficulties.
What happened with LUNA – the theories
The most prominent theory that’s been going around, is that LUNA’s ecosystem crashed because of an attack performed by BlackRock (an investment management corporation) and Citadel (hedge fund and financial services company).
The reason for the attack
The BlackRock company has recently made an agreement with a crypto company Circle, which stands behind the USDC stablecoin.
Now, with the UST gaining more value and surpassing next stablecoins, the USDC may have felt threatened.
This could be the reason why BlackRock has engaged in the attack, aiming to depeg the UST value by decreasing the value of LUNA itself.
The attack
So, how did it all happen? BlackRock and Citadel, have allegedly:
- borrowed 100k BTC
- exchanged 25k for UST
- called Do Kwon and asked if he’d be interested in selling UST at a discounted price for a significant amount of BTC
Do Kwon agreed and has exchanged large amounts of UST for Bitcoin. And that’s when the worst thing for LUNA happened.
BlackRock and Citadel started selling all the BTC and UST acquired, which caused people to panic and get rid of any UST they had.
This broke down the USD (to which UST was directly connected) and allowed BlackRock and Citadel to pay off what they borrowed at the start and gain revenue. UST failure means that USDC stablecoin can breathe again without the risk of UST surpassing it.
Terra (LUNA) Anchor Protocol
Now, the real reason why people panicked so much about UST is because of the Terra (LUNA) Anchor Protocol.
The Anchor Protocol is a landing and borrowing protocol providing a high and stable interest rate of up to 19,5% for staking the UST.
People who decided to get involved in UST staking with the Anchor Protocol could earn quite a lot, due to the high interest rate.
However, from the Anchor Protocol perspective, such a high interest rate offered was risky from the beginning, and proved to be catastrophic when the crash occurred.
UST and LUNA’S connection explained
The UST and LUNA have been created as directly connected. The UST, as was already mentioned, is in turn pegged or linked to the USD.
This mechanism was created to make UST a stablecoin and offer traders and other crypto-users, an alternative to highly volatile cryptocurrencies.
But how does it actually work?
Let’s try to untangle these connections and their meaning:
UST – demand/supply and the influence on its value
- high demand for UST and low supply of it result in increased UST value
- low demand for UST and high supply of it result in decreased UST value
The UST exchange rate should be as closely linked or tied to that of USD as possible. Hence the creation of the LUNA currency.
LUNA and UST connection
Once the UST price gets above $1, the conclusion is simple – the demand is too high, while the supply is too low. Now, to bring it closer to the actual value of the USD, the protocol asks people to burn LUNAs and create USTs instead, to help increase the supply and fulfil the hole in the market.
This in turn, results in decreasing LUNAs amount in circulation and helps increase the coin value.
Of course, this could work the other way around, meaning that if the supply of UST is too high and the demand too low, the protocol asks people to burn USTs and exchange them for LUNAs. This occurs when the UST price gets below $1 and helps decrease the USTs in circulation, bring up its value, and decrease the value of LUNA at the same time.
The protocol allows traders to exchange one LUNA dollar worth for one UST, no matter the current value of the actual USD. One LUNA dollar worth can be exchanged for one UST, even if the UST itself lays lower than the actual USD.
This in turn helps traders make money on the exchanges made and creates an incentive for them to help keep the UST value as close to the regular USD.
That was the main idea on how LUNA would help maintain the stable value of UST, and which it successfully did until its crash on May 11th, 2022.
The plan to save LUNA
Do Kwon twitter account has been under an eye of many hoping for a plan to save the LUNA ecosystem.
LUNA creator has listed many points and steps aimed to be taken to safe LUNA, including a plan to adjust the LUNA mechanism to be collateralized. However, as of now, there is no official plan on how to safe the ecosystem and undo the crash.
Cancelling LUNA and the Terra blockchain
May 12th, 2022, Terra (LUNA) validators halt any operations performed on its blockchain, resulting in stopping the Terra Blockchain on the 7 603 700 operation.
However, a few days later, the Terra Blockchain has been reactivated, which makes it possible to conduct transactions again.