The Sudden Downfall of Luna

By  //  June 28, 2022

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A popular cryptocurrency, Luna, the native token of the Terra network has witnessed a sudden and dramatic failure in its market capitalization. The sudden downfall of Luna had made investors lose their life savings in seconds. The cryptocurrency was once ranked among the top 10 most valuable cryptocurrencies which has now changed its position.

Cryptocurrency has become more of a fear for investors in the crypto market. Here you can get more information about Bitcoin the king of cryptocurrencies.

Terra (Luna) witnessed an all-time high value of $120 in April 2022, however, the recent crash has brought the price down to $1, labeling it as the worst collapse in the crypto market. 

WHAT IS LUNA? 

A South Korean blockchain development company, Terra lab planned its project on the terra network, which hosts two major cryptocurrencies: Luna and TerraUSD. The blockchain-driven platform enables developers to create customer decentralized applications for distinct uses, however majorly centers around Defi, NFT, and Web 3.0 projects and applications via the DPoS method. (Delegated proof-of-stake).

The platform is also connected with blockchains such as Ethereum, Binance Smart chain, and Harmony. The two native tokens of the Terra network have different functions. The UST is a stablecoin and pegged to $1. Staking, and shifting tokens are some functions of the same. While on the other hand, Luna is a tradable asset that works upon the market volatility and keeps fluctuating. 

ALGORITHM PEGGING

The two cryptocurrencies of the Terra network are linked where the Terra UST is pegged to Luna via “algorithm pegging”. A stable coin is backed 1:1 with tangible assets like dollars and gold which enable investors to ensure that the price remains at $1. The mechanism utilizes smart contracts to change the price of assets. Here, Luna tokens are burned via a smart contract to generate new UST tokens, where the UST prices stay the same. 

REASONS WHY THE TERRA WITNESSED A MAJOR DOWNFALL

The price downfall happened in early May 2022, when the UST price dropped from its $1 peg. This led to a huge mint of Luna for stabilizing UST. The change flooded the market with Luna tokens, and prices fell down and down overnight. The once famous cryptocurrency went from the top 10 to not even making the list of top 150 within a single night.

HOW CAN THE DOWNFALL AFFECT THE REST OF THE MARKET?

It is very common for investors to think about other cryptocurrencies and the fluctuations the crypto market can witness due to the sudden downfall of LUNA/UST. The crypto market has been witnessing a rough time before the incident itself. The price value of bitcoin dropped by tens of thousands of dollars, pulling it down to the lowest value in two years, still ten times higher than the price in 2019.

Other major cryptocurrencies such as Ethereum, Solana, and Cardano have also experienced major losses in the same period. Apart from the fluctuation and drop of cryptocurrency prices in the Bitcoin era, the issue of stability of other stablecoins, particularly on Tether has become quite a discussion too.

The most popular form of stable coin broke its $1 peg, resulting in a massive turnover in the entire global market of cryptocurrencies. However, the blockchain-based platform has planned and released some strategies to recover Luna and UST on social media handles via Twitter. 

LESSONS LEARNED FROM THE COLLAPSE

Regardless of the downfall and hardships being faced by Terra and other cryptocurrencies in a while, several learning lessons have emerged that need to be informed for investors to have a safer crypto journey. One must always remember that Stable assets need stable reserves.

These coins provide both the new and old financial works such as decentralization and speed, along with fiat currency value stability. Another great lesson to learn from the incident is to always look for value and not the hype. A higher market cap does not mean higher and more reliable investments.

One must perform own research and plan investment strategies accordingly. The nature of cryptocurrency is not always decentralized. A lot of bitcoin trading platform witnessed several different changes and includes a variety of different cryptocurrencies in their market. Terra initially gained a lot of hype about building a decentralized source of income however the incident led to the company revealing that the mechanism is centralized and consists of an unclear governing structure.