Unprecedented Terra Luna Crash Occurred Recently. The billion dollar question Will Luna Recover In 2022 ?
Most cryptocurrencies experienced a steep decline in value during the past week. The Terra (LUNA) and TerraUSD (UST) tokens have suffered the most incredible price declines among many other digital assets.
According to data from Coinmarketcap, the price value of the cryptocurrency LUNA has declined by over 100%. As of May 11, 2022, the price of this token had dropped to $6 from its initial price of $88 on May 5, 2022. The token fell further in value reaching $0.02 by May 12, 2022. At the moment, the Terra Luna price is $0.0003922.
Closely associated with LUNA, the TerraUSD (UST) stablecoin has also experienced a significant drop in its value. In an occurrence not common in the crypto space, the UST stablecoin dropped below its $1 valuation. Currently, one UST stablecoin is valued at $0.1913.
This article will discuss the factors behind the crash of the Terra (LUNA) and TerraUSD (UST) tokens. Additionally, we will provide a verdict on the long-term prospects of both crypto assets. However, let us first provide background information about the Terra project.
What is Terra LUNA?
Terra (LUNA) is a popular crypto asset that was launched in 2019 under the Terraform Labs platform. The Terraform Labs platform was founded by famous Seoul-based entrepreneur and programmer Do Kwon.
The Terra platform operates on a proof-of-stake consensus, thus offering faster crypto transactions than Bitcoin. TerraUSD serves as the main stablecoin on the Terra network.
However, it is important to note that UST is not like many other stablecoins. This digital asset is considered to be an algorithmic stablecoin. We will discuss this in greater detail later on in the article.
Terra stablecoins are maintained in value by an innovative method. The protocol creates stablecoins that track the value of the fiat currencies against which they are pegged at all times. With this feature, TerraUSD stablecoin can track and maintain the value of the US dollar.
Before its recent slump in value, the UST stablecoin had the largest market capitalization of decentralized financial tokens. As of March 2022, the market cap for the UST stablecoin was worth over $30 billion.
How Is Terra LUNA Supposed To Function?
The Terra network offers a wide range of stablecoins to its users. These stablecoins are pegged to the value of different fiat currencies. The UST stablecoin is the most popular stablecoin offered by the Terra network.
As its name suggests, the TerraUSD stablecoin is pegged to the US dollar value. Therefore, one 1 UST token is supposed to equal $1. The UST supply is not fixed. Instead, the supply of this stablecoin is determined by the demand of users. This factor plays a vital role in maintaining the 1:1 peg with the US dollar.
As an algorithmic stablecoin, the UST token has a unique relationship with the LUNA token. Both tokens are minted and burned to maintain a balance in their respective values.
In this way, LUNA helps to serve as a counterweight to the UST token. This system also helps to ensure the UST token maintains a 1:1 peg to the US dollar.
By relying on market arbitrage, UST holders can help maintain its value by buying the token when it dips below $1. Additionally, when it surpasses $1.01, UST stablecoins holders are tasked with selling the token to lower its price.
In a bid to maintain the value of this digital asset, the team behind this project recently purchased $10 billion in Bitcoin. Terra took this action to ensure that all crypto assets on the platform would remain valuable.
Terra Luna Crash : Terra and UST Will Luna Recover?
Luna crash explained: The LUNA and UST tokens encountered major problems on Saturday, May 7, 2022. The UST stablecoin price fell to 98 cents and remained within that price range for an extended period.
This was not supposed to happen under the arbitrage theory that powered the token. If you are conversant with the financial markets, this trend indicated to investors that it could not break the buck.
In the financial markets, breaking the buck occurs when a fund’s net asset value (NAV) falls below $1. Investors may lose trust in a project and rush to secure their financial assets when this becomes apparent. This often results in a massive sell-off.
The scenario above perfectly explains the recent sell-off with the UST token. Stablecoins dropped below $1 for an extended period, resulting in billions of UST being removed from protocols.
This action indicated two main issues. First, it reflected a collective lack of trust in the value of UST. Moreover, it implies that some individuals might have coordinated attacks to profit from a massive decline in the coin’s value.
The apparent lack of trust and a drop in the value of the UST token resulted in a massive crash for the LUNA token. By May 12, 2022, LUNA’s price was below 0.02 cents. The market cap of Luna has fallen from $40 billion to slightly over $200 million. During this period, the UST’s price fell to 15 cents.
A major drop in the value of its assets and a lack of trust in its project led developers at the Terraform Labs to restart its blockchain.
Will Luna Recover again ? : Future Prospect after the infamous Terra Luna Crash
There is a slight chance that the LUNA token can recover from its present slump. However, the current state of crypto markets means that any potential recovery will take some time.
In the meantime, the founder of Terraform Labs, Do Kwon, has announced a recovery plan for members of the Terra community. This recovery plan will see the community completely abandon the UST stablecoin.
Do Kwon proposes that validators on the Terra network fork the chain and reset ownership with a new token replacing the UST stablecoin. After a successful fork, there will be a distribution of tokens to compensate all damaged parties fairly.
Speaking at a forum on Friday, Do Kwon stated the LUNA had become so diluted to a point where its relationship with the TerraUSD stablecoin can no longer exist – even if the token somehow repegs with the US dollar.
He also noted that any trust in the UST token had been destroyed by recent events, making it unsuitable to serve as decentralized money. Hence his current push for forking the chain.
Do Kwon wishes to preserve the Terra ecosystem and community and insists validators reset the network ownership to 1 billion LUNA tokens. Currently, there are over 6 billion LUNA tokens in circulation.
Terra community members will receive a significant portion of the new tokens as compensation. As part of his compensation plan, LUNA holders who held this digital asset during the first depeg of the UST token this month would receive 400 million tokens.
Additionally, an extra 400 million tokens will be distributed to LUNA holders who held the token at the time of the fork. Next, 100 million will be allocated to all LUNA holders before the Terra chain closed this month. The remaining 10% will be allocated to the community pool.
Terraform Labs will not be holding any new tokens since Kwon intends for the new chain to operate as a community-owned platform. The currently proposed plans are in stark contrast to Kwon’s original recovery plan for UST.
There has yet to be any indication that validators have accepted these proposals on the Terra network. For now, we will have to wait and see how Do Kwon and Terraform aim to solve the current challenges facing the LUNA token.
