What happened to Luna?
The de-pegging catastrophe with the UST (Terra USD), an algorithmic stablecoin, caused the cryptocurrency to plummet by almost 80% on Wednesday.
But what is the connection between Terra Luna and UST?
The adoption of UST as a stablecoin is critical to the Terra ecosystem’s development, hence the LUNA token and UST are intrinsically linked. LUNA invests in UST but loses money as UST demand grows. The LUNA supply may become severely deflationary in the long run after upgrades like Columbus-5.
If UST is viewed as volatile, the value of LUNA may plummet. UST lost its peg as a result of the Wormhole hack, forcing the value of LUNA to decrease briefly.
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What caused UST to de-peg?
On May 9, 2022, the US dollar was devalued, falling from $1 to $0.68. It was unclear at the time of writing whether UST will resume its peg.
When UST began trading substantially below its dollar peg, users began exchanging UST for competing stablecoins, shrinking the UST Curve pool. Short selling caused the price of LUNA, the UST collateral, to fall. Terra was compelled to mint more LUNA to relieve the negative price pressure.
The UST rate is falling. The LUNA’s value fell as a result, despite the fact that the peg was not restored. The Terran Treasury’s $1.5 billion Bitcoin auction failed to restore UST’s faith. T-bill holders, like bank robbers, would rather accept pennies than LUNA.
“The recent occurrence of UST losing its dollar peg has sent shockwaves across the crypto market as it has exposed the vulnerability of algorithm backed stable coins,” Jennifer Lu, co-founder of Coinstore, told Business Today. UST went as low as $0.60 yesterday as a result of the greater liquidations caused by macro-market instability, triggering a significant sell-off in LUNA and one of the largest price crashes in the company’s history. The Luna Guard Foundation (LGF) rushed to assist UST by liquidating significant Bitcoin holdings in order to keep the currency’s value. LUNA is currently trading around $11, down from an all-time high of $119.18 in April 2022. This period of turbulence in LUNA is projected to continue in the coming weeks as the entire crypto market remains unstable.”