LUNA, a cryptocurrency linked to the TerraUSD stablecoin, is now essentially worthless. LUNA was worth $0.01862 as of noon Thursday, May 12, 2022, and as of May 16, 2022, it is floating at $0.0002436 according to coinmarketcap.com.
In a matter of time, this algorithm-backed altcoin dropped by 97%, sending shivers across the spines of all investors. Here is a snapshot view of what the steep decline looked like:
What is Terra?
Terra is an open-source blockchain technology for an algorithmic stablecoin*, a type of cryptocurrency that tracks the price of currencies or other assets. Terra stablecoins could be instantaneously spent, saved, traded, or exchanged thanks to the Terra blockchain.
The Terra protocol generates stablecoins that monitor the price of a fiat currency over time (a government-backed currency such as the U.S. dollar or euro). Terra (LUNA) and TerraUSD (UST) are the two crypto coins that make up Terra.
*Stablecoins are digital currencies tied to conventional assets like the U.S. dollar. They are a widespread means of exchange, typically utilized by traders to shift cash around and speculate on other cryptocurrencies during the market upheaval.
LUNA & UST – The what, how, and why
Luna (LUNA) and TerraUSD (UST) are two native tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea. As the laters name suggests, the United States Dollar is linked to TerraUSD. As per the founders’ plans, people were meant to be able to exchange one for the other (LUNA for UST and vice versa) if one of the two dropped below that price.
From the use cases angle, other than payments, lending, borrowing, and donating, LUNA lets users pay network fees, vote in elections, invest in the Tendermint Delegated Proof of Stake consensus method, and peg stablecoins. Furthermore, the Terra ecosystem’s consensus process allowed LUNA holders to stake their tokens. Users who staked LUNA received payouts derived directly from Terra protocol switch fees*.
*Switch fees are charged when users transition between LUNA and a Terra stablecoin.
Before this drop, LUNA was the tenth-largest cryptocurrency, according to Coinmarketcap, with a total market cap of nearly $34 billion, overtaking Polkadot and Avalanche. LUNA had increased by 12,000%. However, the 2022 beginning was not great for LUNA. It started this year at less than $1.
What went wrong with LUNA?
While there are multiple theories as to what went wrong, here are a few that could probably make sense:
- On May 7, 2022, over $2 billion worth of UST was unstaked, and hundreds of millions of that were immediately sold. This could have triggered the volatility and the market sentiments, eventually affecting the cryptocurrency’s prices. As expected, people rushed to take advantage of the arbitrage by exchanging 90 cents worth of UST for $1 worth of LUNA. However, the speed breaker changed the game as only $100 million worth of UST could be burned for LUNA in a day. Whether this was a planned move or just the heat of the moment could be debated in detail. However, some have speculated that an attacker attempted to break UST in order to profit from shorting bitcoin — that is, betting on its price going down.
- Charles Hoskinson, the inventor of Cardano, proposed one possibility, although he later removed the tweet. He indicated that a huge organization had borrowed 100,000 Bitcoin from the Gemini exchange on Twitter. They subsequently exchanged a significant sum of BTC for UST at a discount with Do Kwon over the counter (OTC). Thus the UST liquidity was reduced. That institution allegedly dumped massive sums of BTC and UST on the market, resulting in a liquidation avalanche of leveraged longs, slippage, and panic selling by investors, with many liquidating their LUNA holdings unstaking their UST to sell it. According to that tweet, Terra was a massive scam with insufficient BTC reserves to avert the crash. However, none of these allegations have been proven, and Gemini has stated that it did not provide such a loan.
In contrast, market manipulation is ubiquitous in all financial systems. Even if Gemini’s post is correct, Hoskinson (@IOHK Charles) subsequently tweeted that someone did assault, Terra. For the time being, no one knows who it was, and social media is awash with speculation and many interpretations.
- As vouched by many experts, Algorithm failure seems to be one of the base reasons.
Will LUNA recover and get back stronger?
Catching a falling knife and buying Terra (LUNA) at this juncture is a high-risk investment when it has dropped 98–99% twice in two days. The difficulty that several investors who bought the dip failed to anticipate is that hyperinflation would drastically increase the circulating supply of LUNA. As a result, if LUNA were to reach its previous all-time high at this moment, it would overtake Bitcoin in terms of market capitalization. The primary issue is the inflation of the LUNA supply in circulation, which Terra Labs and the Luna Foundation Guard (LFG) would burn to recoup.
Proposals 1164 and 1188 to burn $UST has been announced on the official TerraUSD (UST) Twitter account to correct the problem. In addition, the Terra blockchain was shut down on May 13, 2022, ‘to avoid governance assaults as a result of extreme $LUNA inflation.’
Some experts on crypto Twitter say that the risk/reward of buying LUNA is reasonable, given that the LUNA slide from its all-time high of $119.55 to the current 2022 low of 0.00004 USDT was a 99.999% correction.
LUNA still has a significant following and community of investors that are optimistic about the Terra project and a more prominent leadership team than Do Kwon, who has lost popularity in the crypto community.
Currently, most of the crypto exchanges in India have already delisted LUNA.
The question still arises: Will LUNA rebound in 2022 or 2023? Unfortunately, with exchanges delisting LUNA and its bailout not materializing and BTC losing monthly support, a LUNA price projection is impossible at this moment.
Rather than predicting the future, let’s wait and see what happens next?
But for now, How is WazirX handling the LUNA downfall and its disheartened investors?
WazirX delisted 3 market pairs associated withLUNA (LUNA/USDT, LUNA/INR, and LUNA/WRX) on May 13, 2022. While these downfalls are not in the hands of the exchanges, we at WazirX have tried our best to enable the LUNA investors to withdraw their funds. For this, Binance free transfers have been enabled for users to withdraw their LUNA funds.
To know how to connect the WazirX account with the Binance account, please refer to:
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.