“Whenever the price of cryptocurrency is rallying, people start spending a lot more.” - Erik Voorhees
Luna-Terra crash: A brief history of failed algorithmic stablecoins-The crash in Terra sisters has still mind-boggled investors across the globe sparking cautions in the crypto market. Top of the house cryptos, Bitcoin and Ether also faced the brunt of selling pressure in stablecoins.
What is Stablecoin?
A "stable" reserve asset, like the US dollar or gold, is the premise for a stablecoin, which may be a variety of digital currency. As compared to cryptocurrencies like Bitcoin that don't seem to be pegged, stablecoins are intended to reduce volatility.
Stablecoins are proof against the volatility of cryptocurrencies that don't seem to be tethered to anything. Anyone can access stablecoins on the net, round the clock, and in any country.Sending them is quick, affordable, and secure.They are programmable in digital form and native to the web
Brief History-
In January 2018, Daniel Shin and Do Kwon established Terra. The 2 came up with the thought for the initiative as how to accelerate cryptocurrency and blockchain technology adoption by emphasising usability and price stability. Kwon is the CEO of Terraform Labs, the organisation that created Terra. Both Terra (LUNA) and TerraUSD (UST) were created by Terraform Labs. the thought to form an ‘algorithmic stablecoin’ where LUNA may well be burnt to ‘mint’ UST to stabilise it whenever it loses its 1:1 peg to the dollar, and the other way around, is different from how other stable coins like Tether (USDT) and USD Coin (USDC) function. It worked, until it didn’t.
Why did it crash?
It's crucial to know Terra's "Peg-Mechanism" before delving too deeply into the difficulty. The 2 major assets of Terraform Labs are Terra (LUNA), the native token, and TerraUSD (UST), a stablecoin. As an algorithmic stablecoin, UST's stability is closely correlated with the value of LUNA. If UST loses its peg at $1, it's burned and new LUNA coins are produced in its place. Additionally, LUNA coins are burned when UST climbs significantly while fresh UST coins are created. Consequently, the worth of every price remains constant. The $285 million worth of UST that was liquidated on Curve and Binance caused problems.
The price of the stablecoin TerraUSD and its sister currency Luna fell by roughly 80% in recent days, causing the larger cryptocurrency market, which incorporates coins like Bitcoin and Ethereum, to tremble. Nearly nothing is left of Terra Luna. Even strongly positive cryptocurrency investors are already panicking as a result of this spreading concern among investors.
In order to revive the UST's peg, Terraform Labs sold off all of their 40K BTC holdings. As a result, there was a major cryptocurrency drop, and for the primary time since December 2020, Bitcoin plummeted below the $27,000 mark. After a negative start to May's trading, the cryptocurrency market was consolidating between small bands when a large infusion of BTC significantly destabilised the full market.Additionally, the costs of UST and LUNA both started falling sharply and without warning! New LUNA coins were produced as UST lost its peg, which had a major effect on their pricing. As a result of its 20% interest on UST deposits, the well-known lending technique Anchor also saw significant ANC withdrawals.
Can terra luna price ever recover?
The stability of the algorithmic stablecoin was severely questioned and condemned following Terra's mishap, a primary for the entire cryptocurrency industry. The project has currently been stopped on the Terra blockchain, while it'd be picked up again within the future. Therefore, little probability of a recovery or rebound can now be anticipated.
Did you know?
Even stablecoins backed by dollars aren’t actually backed by dollars. Tether uses a combination of corporate debt, cash and treasury bills. The motive is to have some holdings with high liquidity but also appreciate in value.
BY:
Guneet Kaur Bindra
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