Terra Terror: What Happened to the Hottest Crypto Coin?

Published May 19th, 2022 - 07:30 GMT
Terra Terror: What Happend to the Hottest Crypto Coin?
Usually, in times of downfall like this one, crypto traders seek refuge in stablecoins as it makes it easier for them to exit crypto markets; however this time, the UST situation called the whole concept of stablecoin into question.  (Shutterstock)
Highlights
While the scrutiny if the traders will trust stablecoins again remains, here is all you need to know about the Luna crypto crash.

The controversial UST and its sister currency LUNA have dropped roughly 99% in the last few days, with a rattling echo to the broader crypto market, including bitcoin and ethereum. This has caused even some of the most bullish investors to become fearful.

 Usually, in times of downfall like this one, crypto traders seek refuge in stablecoins as it makes it easier for them to exit crypto markets; however this time, the UST situation called the whole concept of stablecoin into question. 

While the scrutiny if the traders will trust stablecoins again remains, here is all you need to know about the Luna crypto crash.

What is UST? 

UST is an algorithmic stablecoin, which means that its $1 peg is supposed to be controlled by smart contracts. This is fundamentally different from other stablecoins, such as USDT (tether) and USDC, which are backed by real-world assets like USD. UST has no physical reserves but rather is backed by its sister Luna and some BTC.

Consider the entire Terra economy to be divided into two pools: one for UST and one for Luna. The Luna supply pool adds to or subtracts from UST's supply to keep the price stable. The protocol's algorithmic market module incentivizes users to burn (spend) Luna to mint UST and UST to mint Luna. Hypothetically, this (in)famous burn-and-mint mechanism worked fine, until it didn't.

What happened?

Due to macroeconomic factors, BTC started trading lower. Like we mentioned earlier, UST is partially backed by BTC and that caused a massive drop in the once “stablecoin” price. To try to maintain back the USD-peg, the issuer of UST minted more LUNA. You guys know what happens when the supply increases massively.. Yup the price dips further! Terra increased the minted LUNA more than 20 times over the regular pace. On Wednesday, the supply of Luna, which was the top-10 coin by market cap, increased by 1.2 billion, from 386 million to 1.5 billion. So far today, the supply has risen to 7.1 billion, an increase of 5.5 billion.

As a result of the debacle and sudden price dip of LUNA, investors mirrored the price drop causing a huge sell-off.

What will Terra do about it?

As the dust settles from Terra Terror, its blockchain resumed activity on Friday after a nine-hour pause. Do Kwon, the CEO of Terraform Labs, submitted a "Revival Plan" to relaunch the Terra blockchain, with a new ‘hard fork’ that will help solve the design flaws in the ecosystem. But will this be enough to save LUNA? That's the question on everyone's mind.

Takeaways:

We want to clarify that not all stablecoins are the same, as some are backed by fiat like USDT and USDC, while others stabilize their value based on an algorithm that balances the stablecoin with a partner token, like UST and Dai (Pegged to Ether). This means that whatever happened with UST will NOT happen with USDT or USDC.


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