Everyone in the crypto world is familiar with UST which is the fourth largest stablecoin in the world. The recent buzz about the bloodshed of the Terra project, its native token LUNA and a stablecoin UST is breaking all the news headlines. What is Terra (LUNA)? How does UST stablecoin work? Why did LUNA drop in value? Tune in and find the answers in this article.
What Is Terra (LUNA)?
Luna (LUNA) is the native token of the blockchain project Terra built on Cosmos SDK. Since its launch, the Terra ecosystem has developed more than 100 projects including NFT collections, DeFi platforms and Web 3 apps.
How is it connected with UST stablecoin? The founders of Luna aimed to set up a p2p e-cash ecosystem and created a system of stablecoins – cryptocurrencies whose value is pegged to real-world assets.
Terra LUNA Price: All Time High
In 2021, the price of LUNA witnessed a cosmic surge from $0,66 to $89 and even in March, 2022 when other cryptocurrencies with global capital markets got catalyzed by the Ukrainian crisis, it broke its all time high of $104.
How Does UST Stablecoin Work?
UST is the 4-th largest stablecoin behind Tether (USDT), USD coin (USDC) and Binance USD (BUSD), surpassing $15 billion in market cap. UST followed the price of the U.S. Dollar hovering closely around $1. In fact, LUNA played a pivotal role in maintaining the price of the stablecoin, decreasing its market volatility.
The UST mechanic was based on traders who were supposed to burn and create tokens to maintain the peg to USD. UST went hand in hand with Luna and each time a UST token was minted, the equivalent of $1 in Luna got burned. When the price of UST went down below $1, traders burned UST getting Luna with a discount. In this case, the price should in theory go up toward $1, maintaining the peg. On the contrary, if the price extended beyond $1, traders were encouraged to burn Luna in exchange for $1 in UST, thus increasing the supply and dropping the price back to $1. This ongoing burning & minting system comprised what kept UST hovering around $1.
Who would expect that when the last time UST started to fall below $1, it wouldn’t stop?
Terra Luna Collapse
Since Luna reached $118 point in April, it has dropped around 97%: 55% on May 10 plus 85% on May 11. If you’ve invested in LUNA at its high, you’ve probably lost about 95% of your Luna wealth. Why has the biggest Korean blockchain project Terra counting millions of investors and users all over the globe collapsed in just a couple of days?
Terra LUNA is an algorithmic stablecoin representing a newly-implemented approach to pegging crypto to real-world assets. Being perpetually vulnerable to the market movements in its design, it couldn’t stand the test of time and the whole cryptocurrency market’s plunging in tandem.
In fact, algorithmic stablecoins don’t have any collateral – they are backed by their governance token used to stabilize the price. If the algorithm gets broken, the value of the coin can drop without a backstop.
UST has ‘de-pegged’ to $0.45 from its value of $1 which totals to 55 % of a drop. When UST massively dropped, LUNA experienced the same output; being interconnected with UST.
UST was backed by 20% of Bitcoin and 80% of LUNA. In fact, Luna Foundation bought in total up to 3,5 billion BTC. They sold 1,5 billion Bitcoin over a time to buy more LUNA to show people that UST doesn’t depend on BTC that much. The attempt to support the price of UST by selling the Bitcoin reserves didn’t go in their favour and Luna crashed in the incredibly short period of time.
LUNA & UST: Is There a Future?
Not everyone could predict such an appalling turn of events as we never saw how algorithmic stablecoins would behave at the global turmoil gripping the crypto market. How to get out of this mess - still remains a question, especially for high net worth individuals who bought LUNA at its high.
Apparently, risks were downplayed in terms of LUNA being a blue-chip on the market. However, there is also a silver lining: when the portfolio is crashed with old coins, we need to battle the possibility of a bounce and its afterward huge returns which is a veritable psychological game. Let’s stay safe and wait for the confirmation when the bull market is getting back.