Why Has Terra Luna Crashed?
May 23, 20224 min read
The financial world showed once again how tough and risky it could treat its devotees. Extremely profitable 2020 and 2021 ended up with a massive crash.
On May 7, the price of the $18-billion stablecoin terraUSD (UST), which is supposed to handle a $1 peg, started to fall and finally crashed to 35 cents on May 9. LUNA, which should have stabilized UST's price, followed the same pattern, sinking from $80 to a few cents by May 12.
Bitcoin lost 17% of its value in five days, and the price of Ethereum fell by 23%.
What Is $LUNA?
Terra blockchain has a native coin called LUNA, which is a stablecoin. Well, at least it was. Stablecoins are tied to a commodity or a currency. Luna has been pegged to the U.S. dollar, which means every single Luna is supposed to be worth $1.
Luna was used for staking, governing, and collateralizing mechanism purposes. LUNA has a supply of 1 billion coins. Once it’s going upper to this limit, it will cause the protocol to burn LUNA tokens automatically. The token is crucial for the ecosystem to ensure the price stability of Terra stablecoins.
Why Has Luna Crashed?
So, what has happened to a stablecoin Luna, and why has it left the Earth?
Luna is not the only coin that collapsed and made noise on the crypto market. But many traders and investors were quite sure about Luna’s stability, so that was a real shock for many to lose their money as easily as that.
Luna’s fall came from its link to TerraUSD (UST), another Terra ecosystem’s stablecoin.
There is a point of TerraUSD being tied to Luna. And Terra USD, for its part, was tied to Anchor Protocol, savings account for the currency which paid a 20% rate of interest. Actually, that made it popular to invest in TerraUSD, as there was a guaranteed and quite substantial return.
However, in March, Anchor announced that it was replacing the 20% rate with a floating rate. That met a massive outflow from Anchor, with many holders selling both their TerraUSD and its sister, Luna coin.
With such an exodus of people trying to their Terra USD and Luna simultaneously, the mechanism designed to guarantee stable rates simply stopped functioning.
By Friday, the 13th of May, the price of Luna had fallen below 1 cent while TerraUSD, supposed to be worth one dollar, slumped to $0.14.
Current LUNA Situation
Terra LUNA’s price is rising again, so it was up to 59% on the 22nd of May, trading at $0.0001912, surpassing $1.2 billion in market capitalization. Such a hike for LUNA is likely connected to Terra’s Founder, Do Kwon’s statement, responding to questions from the community and an upcoming plan of surviving — Rebirth Terra Network. The plan suggests launching a new Terra chain without the algorithmic UST stablecoin.
The old chain will be named Terra Classic ($LUNC), and the new chain will be called Terra ($LUNA).
Above all, according to the proposal:
“Luna is to be airdropped across Luna Classic stakers, Luna Classic holders, residual UST holders, and essential app developers of Terra Classic. TFL’s wallet will be removed from the whitelist for the airdrop, making Terra a fully community-owned chain.”
Over 65% have supported the proposal, with 20.51% voting to refrain, 0.38% voting didn’t like the plan, and 13.75% said ‘No’ with a veto.
Technically, the proposal could be denied, but it will most likely get accepted. The acceptance of the proposal is a considerable driver for the bullish momentum that LUNA is experiencing.
Although Do Kwon doesn’t support the LUNA’s burning and calls it pointless, the community started burning LUNA after he provided a burn address via Twitter.
Bitquery.io claims that the burn address received over 250 million LUNAs. At current prices, that’s about $47k, a rather low amount if compared to the broader picture.
LUNA’s current supply is over 6.5 trillion, so 250 million is a kind of band-aid compared to the total circulating supply of the cryptocurrency. Once that number is about 1 trillion, then it could have a serious impact on the price and sentiment of the token, but not now.