Luna Nosedives Under $2, Loses 98% Of Its Value As TerraUSD

Thursday, May 12, 2022
author picture Alice Dupont
Video/image source : youtube, gamelivest
Original content created by staff

Luna Nosedives Under $2 Loses 98% Of Its Value As TerraUSD Continues To Fall

Investors are dumping UST as the price of TerraUSD continues to fall. This article will explore the reasons why Investors are selling UST and the stability of LUNA. I also discuss the dangers of Terra's algorithmic stablecoin and the need to use it with caution. This article is not a recommendation to buy LUNA or UST.

LUNA's price maintenance mechanism

Last week‚ the LUNA and UST lost tens of billions of dollars and analysts are assessing whether they are on the verge of imminent demise. The Luna Foundation Guard has recently announced that it will lend the Terra community $1.5 billion in bitcoin reserves. This move could be an effort to absorb UST sell-pressure and push LUNA back to the $1 peg. When the crash happened‚ the developers of LUNA bought billions of Bitcoin to maintain the UST's value. As the crisis escalated‚ some developers started selling their Bitcoin holdings. The result is that the LUNA price plummeted to $1.20‚ from a high of $115. The UST creators have pledged to restore the system to its former state. With this price maintenance mechanism‚ LUNA will retain its value for at least two years. If the price is under $2‚ it will lose 98% of its value as TerraUSD‚ and will drop to a lower price - even below zero. Terra also uses Cosmos SDK blockchains for cross-chain compatibility‚ and LUNA holders can borrow the coin through the Anchor Protocol. Over the weekend‚ the Terra USD price dipped below the U.S. dollar's peg. The news caught the attention of US Treasury Secretary Janet Yellen‚ who cited the situation in a Congressional hearing. The de-peg of TerraUSD is a relief for investors‚ but a major concern is how the price of the coin will react in the short-term.

Investors dumping UST

The price of Luna (LUNA) is falling on the heels of news about the US Federal Reserve raising its interest rate and the release of inflation data. As a result‚ the LUNA price has dropped by as much as eight percent and the overall crypto market cap has fallen by around seven percent. However‚ this recent sell-off may be the result of big investors‚ known as crypto whales‚ shorting Luna. The market is worried that the UST (LUN) token‚ which is a stablecoin‚ will collapse. It has been losing its peg to the dollar during the recent cryptocurrency sell-off. To remedy the situation‚ the developer‚ Do Kwon‚ is increasing the number of new lunas minted each day. His goal is to bring the UST back to its $1 peg‚ thereby boosting its price. In the days before the price crash‚ UST developers bought billions of Bitcoins to support the value of the UST. But when the crisis hit the markets‚ they sold some of their Bitcoin. As a result‚ LUNA's market price has plummeted to less than two dollars. This is a substantial drop from the peak of $115 seen in April. The price of LUNA is still below the $115 mark despite its pledge to restore the system to normalcy.

Terra's algorithmic stablecoin's price maintenance mechanism

The algorithms that power the price maintenance mechanism of algorithmic stablecoins are not foolproof. They depend on investor demand and the economic incentives to keep the price of the coin stable. When these incentives are removed‚ the model breaks down. For example‚ Terra relied on continuing interest in its ecosystem‚ support from crypto reserves‚ and willing arbitrageurs to keep the price stable. This model is likely to fail when the demand for the currency drops. TerraUSD‚ the sister token of Luna Nosedives‚ recently plunged to 26 cents. The stablecoin is meant to keep a one-to-one peg to the U.S. dollar. However‚ it lost 96% of its value in the past seven days‚ recouping to $1.18. But the prices of both LUNA and UST have since recovered to over $1. Terra's official peg defender‚ the Luna Foundation Guard‚ raised $1 billion in private token sales. This fund will keep the flagship stablecoin‚ LUNA‚ at its current value. As a result‚ LUNA can only rise in value if the reserves of Terra's governing council are withdrawn‚ making it vulnerable to market instability. But in the case of LUNA‚ the foundation will be able to intervene in the market when it becomes necessary. The system works with its sister token‚ LUNA‚ to keep LUNA's $1 price. When the price of LUNA falls below $1‚ the UST is incentivized to burn‚ increasing the supply of the crypto. That means LUNA shouldn't drop below $1‚ which is what happened on Sunday. However‚ UST is still a few cents off the dollar peg on Monday‚ and on Tuesday‚ it was off by 10 cents. Moreover‚ UST deposits fell from $14 billion to $11.2 billion.

Terra's native token LUNA's dependence on UST

One of the big four exchanges in Korea has suspended trading in Luna‚ which is one of Terra's ecosystem tokens. Meanwhile‚ Anchor‚ the native token of Terra's dominant DeFi platform‚ is down nearly 70 percent in the last day‚ and is on track to deplete its reserve within two months. What can investors do to protect themselves? Here are some tips. You can use the Terra Station wallet to access the market swap feature. This wallet pulls price information from off-chain oracles and displays the target stablecoin price. Terra's native token LUNA'S dependence on UST has been a point of criticism from some investors. Despite the recent volatility in cryptocurrencies‚ Terra has a stablecoin in the form of USD Coin. This allows it to quickly spin out tokens that track other fiat currencies. While Terra's native token LUNA's dependency on UST makes it a controversial stablecoin‚ it could ultimately make the platform more attractive to new crypto investors. The main concern with LUNA's reliance on UST is its price dependence on UST. However‚ this risk can be minimized by LUNA staking. The LUNA will be burned when UST is in high demand and will keep the UST price near $1.00. Moreover‚ LUNA will also be used for staking‚ which helps keep UST's price stable.

Terra's plans to sell off UST

The recent outflow of UST is a clear sign that the crypto market is losing faith in Terra's LUNA‚ the stablecoin which powers the Terra ecosystem. If the price of UST had dropped‚ investors would likely have fled. This massive outflow accelerated after one of the big four Korean exchanges suspended trading. It is still unclear why the outflow has been so intense‚ but some analysts attribute the outflow to a lack of confidence in UST protocol. UST is backed by the U.S. dollar‚ so its value has been artificially pegged. However‚ this peg may soon come to an end‚ and investors will likely lose their money. The question is: will the market accept a crypto-backed currency instead? While the UST is backed by the dollar‚ there are many other cryptocurrencies which aren't. In this situation‚ the lack of confidence in UST could mean disaster for Terra's ecosystem. The UST peg was weakened after UST wobbled again on Monday‚ which could have dire consequences for the rest of the crypto market. In the meantime‚ Luna have both plummeted significantly as UST tries to regain its peg. With the market deteriorating as fast as it has‚ Terra may be forced to sell off Bitcoin just to hold its peg.

Terra's native token LUNA's price maintenance mechanism

The price of Terra's native token LUNA has been crashing in recent days‚ with the UST reaching a low of 70 cents in just one day. A prolonged de-peg has resulted in mass withdrawals from the Terra blockchain dApp Anchor. In the past week alone‚ deposits in the Terra blockchain dApp Anchor have fallen by $7.8 billion‚ and the net supply of UST has shrunk by $1 billion. In addition to massive de-pegs‚ the Terra protocol has minted a total of 25 million LUNA since May 7. This increased supply has decimated the native asset‚ which has fallen by 64% in a single week. The Terra ecosystem was launched by Terraform Labs in South Korea. Since then‚ its use has grown rapidly from crypto payment protocols to decentralized finance‚ gaming‚ and non-fungible tokens. While the project continues to make strides‚ the question of sustainability and the long-term value of the Terra ecosystem continues to remain high. Fortunately‚ it's worth taking a look at how the Terra ecosystem works. The LUNA token is a major source of price stability for the Terra currencies. By using a simple swapping mechanism‚ the LUNA token is pegged to a reserve asset like the Special Drawing Rights or the Korean Won. In addition to peg‚ the UST will be minted by the algorithmic market module of the Terra protocol‚ which makes it possible to mint the token. The algorithmic market module is another critical feature of the Terra protocol.