Luna is currently trading at $0.016.
So, what, right?
Just another shitcoin that crashed with the market?
Well, it’s not that simple. While most Altcoins are being hit by the dollar breakout and dropping 20% – 30%, LUNA decided to take a dive into the bottom of the pool with a maddening 99.9998% crash!
All of it in just a matter of 5 days.
But the question is, why did this happen, and how does it impact the crypto market?
Decoding Terra’s Ecosystem
LUNA and UST are part of Terra’s ecosystem. Both of these tokens are swapped in this ecosystem so that UST pegs around the $1 mark.
How is this done?
A stable coin is generally made “stable” by keeping a reserve of assets like gold and fiat to tackle the volatility of the markets.
For example, USDT maintains a deposit of 1 U.S. dollar for every single Tether coin. But, UST maintains its stability through a smart contract-based algorithm. This means that UST uses LUNA to maintain its peg at $1.
For example, if the price of UST falls below $1, then the people are encouraged to burn (permanently destroy) their UST in exchange for LUNA, as they would still receive $1 worth of LUNA. This decreases the supply of UST and brings its price back to the $1 mark.
This is important to understand as it means that if demand for UST increases and its price rises, then LUNA holders can swap it for UST at the same rate of $1 and make considerate gains. The remaining funds are transferred to the community treasury. These funds are later invested in Terra’s applications and services to improve the ecosystem.
Why Did Luna Crash?
LUNA was such a strong project that it remained firm even in the bear market. Seeing a crash of 99% within a week was not easy to digest.
But, everything happens for a reason, and Luna’s case was no different. Let’s have a look at what led to such a massive fall for this popular crypto.
1. The $200 M Dump Of UST
Things started cooking up when a sudden dump of around $200 M of UST took place. This event immediately depegged UST to $0.985. It was not very long until it recovered back to its $1 mark.
However, this event brought a lot of FUD and panic to the market. In no time, people started withdrawing their UST from Anchor and swapped it for LUNA. In two days, around $3 billion worth of UST was removed from the Anchor protocol, which was offering around 20% APY (Average Percentage Yield) on the coin.
This brought in a lot of selling pressure in the market, and more people started swapping their UST for LUNA to earn profits.
In no time, the arbitrage opportunity exploited the prices of both the tokens as investors kept dumping them in the open market. The result was easily visible to the world as UST fell to $0.5 and LUNA dropped around 90%.
2. Lacking Enough Use Cases
If we monitor it closely, then UST didn’t have much of a use case altogether. Around $14 billion of UST, or 75% of its value, was locked in the Anchor protocol. This was because Anchor was offering a massive 20% APY for UST. The investors just wanted to earn this unusual return from UST, and that was it.
Experts always predicted that this method was not sustainable as the project would someday dry up for Anchor, and then people would eventually sell their USTs as they got fewer returns.
This is why as the UST crashed from its $1 mark, people started selling it, and as it had no other major use cases or volumes, it immediately brought a massive crash.
3. Current Market Conditions
UST malfunction or not, LUNA was probably about to dump a little anyway, given the massive head and shoulder price action it had formed in the daily time frame.
But no one had ever expected it would go even beyond 20%. (Round of applause to those who shorted!)
All this UST dump and arbitrage exploitation happened during a time when the entire crypto market was in deep red. Bitcoin currently trades below $30k, and the market cap has shrunk to $1.2 Trillion. This brought in, even more, sell pressure on Luna.
4. The Arbitrage Backfire
Who would have thought that the method that was meant to keep a token stable became the prime reason for its fall?
Well, this is exactly what happened with Terra’s UST. As the UST depegged from the $1 mark due to the $200 million UST dump in the market, people saw this as an opportunity to make profits.
Let me tell you how:
Suppose UST is pegging around $1, and you decide to swap it for $1 worth of LUNA. It won’t create much difference. But, what happens when the UST depegs and falls under a dollar.
For example, consider UST falling to a price of $0.50. This means that people can buy 20 UST for $10. What’s interesting is that people can easily swap these 20 UST for $20 worth of LUNA using Terra’s ecosystem and then sell LUNA on the open market. Easy 100% profit in a matter of minutes.
This is how steep selling pressure came into the market. However, this was not the only reason for LUNA’s crash.
The Impact Of Luna’s Crash On The Crypto Market
The crypto space was already down because of inflation fears and the hike in interest rates. The fall of Luna and UST acted as a catalyst in this market crash. The vital part is to understand the long-term impact it will have on the world.
Cryptocurrencies are very volatile, and everyone is familiar with them. But, how do you react when you see a stablecoin plunging 50-60% in a matter of days. This has brought in a lot of fear and uncertainty in the masses.
The anchor platform, offering 20% APY on UST, received around $14 billion. People invested their retirement money in hopes of getting high returns. But as the tables have completely turned, it is highly possible that people won’t be able to trust such platforms anymore.
The credibility of these platforms and projects such as Terra has suffered massive hits, and it won’t be surprising to see people ignoring them in the future as well.
What’s Next For Luna, Zero? Or Does Terra Has A Recovery Plan?
Well, if the UST somehow manages to get back to the $1 it’s supposed to be, there’s still hope for LUNA to revive.
But will it ever be able to reach its all-time high again?
Well, it’s a hard pass. Even if all the funds withdrawn from Luna are restored, it’s still impossible for Luna to revive to the $100 mark it was once at as there are now 6,907,376,873,996 LUNA tokens in circulation.
This is why LUNA will never see ATH again; even its chance of becoming $1 is nil. If LUNA goes to $1 again, it would have a market cap of $6.9 Trillion which is practically impossible. Even at $0.1, LUNA would have a market cap of $690 Billion.
But that does not mean Luna can’t survive this at all. However, it does seem like a big wall to climb as such an event has definitely crushed the people’s trust in the project and with the overall declining market, it’s really hard for anyone to predict a local bottom for LUNA.
The founder of Luna, Do Kwon took to Twitter to handle the panic situation with a recovery plan.
14/ Terra’s return to form will be a sight to behold.
We’re here to stay. And we’re gonna keep making noise.🌕
— Do Kwon 🌕 (@stablekwon) May 11, 2022
According to him, the Terra team is continuously trying to absorb the enormous supply of UST. Comparing this crash with last year’s, Do Kwon says that the team will be able to overcome this and revive again in the times to come.
But seeing the current situation and the continuous fall of Luna, it seems really tough for the crypto-currency to bounce back.