This week cryptocurrency investors had (and are still having) a big scare: the LUNA cryptocurrency, which was once worth about $120.00 per unit, entered what it's called the death spiral, costing $0.01 per unit this Thursday (12). But what was there to justify such a fall? Can LUNA bounce back and hit its all-time high again?
Reasons for the drop
The price of LUNA started to drop when there was a great demand for withdrawals from the stablecoin UST, cryptocurrency of the TERRA network that is backed in the dollar. However, unlike other stablecoins such as USDT and USDC, which use bank reserves of dollars to maintain their ballast, UST uses a mechanism in which each new UST issued $1.00 in LUNA is burned. However, this backing system proved to be quite problematic when the Tron network announced that it would implement a new stablecoin yield protocol with an APY of around 30%.
In this way, UST holders started to withdraw their stablecoins from the Anchor protocol, from the TERRA network, to invest in this new protocol from the Tron network. With these mass withdrawals, the UST issuance algorithm began to issue LUNA rampantly, $1.00 in LUNA for each UST, which generated an inflation in the supply of cryptocurrency, which went from 1.2bi to about 53bi, according to data from Coinmarketcap.
In view of this, and also of the generalized fall in the entire cryptocurrency market, the perfect situation for disaster was formed: fearing an even greater fall in the UST, its holders began to withdraw more and more of their assets, which led to a large LUNA issuance and, with the insecurity generated by this event, LUNA holders also started to liquidate their positions, feeding the vicious circle formed by this situation.
Can LUNA still recover?
This is a very difficult prediction to make. It will all depend on how the developer team will handle this situation and how the proposed solutions will be received by the crypto community. The only thing that can be predicted is that this situation will not resolve itself so quickly and that developers will have to work hard to regain investor confidence.
But so, do you believe that LUNA can return to its glory days, recovering market value and investor confidence? Leave your opinion here in the comments.
Anyway… this is a very summarized post on the subject and that maybe it didn't clear all your doubts. But I'll leave some useful links in the resources so you can clarify something that hasn't been explained so well for you yet.
That's it. Thank you for your attention and see you in the next post.