The cryptocurrency market is crashing. The economic situation, inflation and the recent rise in interest rates in the US has caused widespread declines not only in the stock market, but also in some cryptocurrencies that are seeing falls of 80-90% compared to the maximum values they reaped just ago a few months The falls have precipitated, and analysts point to a major culprit: the UST and LUNA cryptocurrencies of the Terra ecosystem, which Some have already dubbed as those responsible for the ‘moment Lehman Brothers‘ of the crypto. Let’s see what all this is.
What is Earth. It is an ecosystem with a chain of blocks, as are bitcoin (with its BTC token) or Ethereum (with ETH). In this case Terra is designed to issue algorithmic stablecoins. There are several associated with the platform, although the best known is Terra USD (UST).
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These algorithmic stablecoins are backed by the native token of this ecosystem, which is called LUNA and is not stable, as we will see later. The Terra network is based on a PoS consensus algorithm, and investors can stack through a decentralized application called Terra Station.
Stablecoins have a purpose. Those algorithmic stablecoins of the Terra ecosystem are pegged to traditional fiat currencies, especially the dollar, and the algorithms promise to maintain that 1:1 parity that essentially means that for the vast majority of their existence, 1 UST = 1 dollar. . Variations have been minimal, and with it investors had a recourse to not get out of the cryptocurrency segment and switch from any cryptocurrency to UST and then use those UST to buy other cryptocurrencies as if they were using dollars.
What was the moon for?. Unlike the stablecoins issued on the Terra platform, LUNA is not a stablecoin, it is a conventional token, but it is important because it serves to support and stabilize that link or ‘peg’ of UST and the rest of the stablecoins issued by Terra.
As Fernando Gutiérrez explained in a thread on Twitter, LUNA is the mechanism that made it easy to support and operate with UST. The demand and supply of UST was regulated by the price of LUNA, which rose if the supply of UST fell and fell if the opposite occurred and demand fell. Theoretically if there was a deviation from the bond, you could arbitrage in the process by buying or selling LUNA.
the thing is messed up. Some changes in the issuance of UST meant that when someone paid with LUNA to buy UST, those tokens were not “burned/destroyed”: a part was kept and those funds were used to buy bitcoin. The bitcoin reserve was managed by the Luna Foundation Guard (LFG), an NGO dedicated to guaranteeing the UST bond and the correspondence 1 UST = 1 dollar.
A protocol called Anchor offered almost 20% if you deposited UST: it was a complex investment that generated a very high demand and that helped LUNA rise a lot in value: at the beginning of May it exceeded 116 dollars. Those responsible for the protocol announced that, in order to guarantee its sustainability, they were reducing interest to around 15%, which reduced the demand for UST. Consequence: pressure on the price of LUNA.
4/ A review of the current situation: UST is currently trading at 50 cents, a significant deviation from its intended peg at $1.
— Do Kwon 🌕 (@stablekwon) May 11, 2022
LUNA loses 99% of its value. To all this was added the economic situation and the fall of cryptocurrencies, which also affected LUNA and UST, whose link was broken (‘depeg’). Some people argues that this is due to an attack by a large investor, but it is not confirmed. The truth is that a dollar was no longer a UST: the value fell and people began to sell en masse. The LFG used its bitcoin reserves to buy UST on the market and reduce the pressure: it sold 1.5 billion dollars in bitcoin and that further aggravated the fall of this and the rest of the cryptocurrencies.
UST recovered a bit of ground and then lost it again, and at this time it is at $0.48 when, we repeat, it had never moved from the range of $0.99-1.01. The future does not look good although there seems to be Attempts from rescue to UST and LUNA, which went from being worth almost 118 dollars a month ago to barely 5 cents (in our previous article, a few hours ago, they were 26 cents). Meanwhile, on the LUNA subreddit have left fixed At the top are the telephone numbers for suicide attention due to the enormous losses that this is generating for many people.