The Terra LUNA Collapse: 4 Lessons To Be Learned Opinion

diciembre 29, 2021 11:02 am Published by Leave your thoughts

Cryptocurrencies are now high-risk assets moving in something akin to a financial Wild West. And the messages of those who have seen their accumulated savings of months or years evaporate in a few days are flooding online forums like Twitter or Reddit. The case might indeed encourage greater interest by the authorities to regulate its operation.

What happens when crypto hits zero?

While the network itself could still remain intact, such a drop would still cause monumental financial losses for millions of individuals worldwide. There would be no way to sell Bitcoin back to exchanges, as they would be legally required to de-list it for trading.

On September 15, it was announced that a court in South Korea had issued an arrest warrant for Do Kwon. This came almost four months after the collapse of Luna and UST, the two tokens that Terraform Labs issued. Do Kwon and five other people are currently accused of violating local market laws. Once a large amount of UST had been offloaded, the stablecoin started to depeg.

Terra’s Do Kwon May Face Charges In The U.S. As Money Laundering Accusations Emerge

Just less than a month before its collapse, UST’s soaring demand propped up LUNA into the spotlight. This caused LUNA to go into hyperinflation, which degraded its value. Afterwards, the spiral of death ensued as the market cap for LUNA is well below that of UST. This meant that there is not enough dollar value in LUNA to make up for the loss of value in UST.

Terra was a crypto project that wanted to promote a blockchain that handles algorithmic stablecoins. Earlier this year in 2022, their famous UST stablecoin could not handle the strong bear market and collapsed from its peg of 1$ down to the current few cents. Its other tokens such as LUNA crashed from a high of 120$ down to near 0$. Traditional stablecoins – like Tether for instance, whose value is pegged to the U.S. dollar – are pegged to real-life cryptocurrencies and hold fiat assets in a reserve to back their tokens. However, an algorithmic stablecoin, like UST, involves using a complex algorithm based on a smart contract.

Are stablecoins actually stable?

The new LUNA was then launched and airdropped to holders of LUNA taking at a particular snapshot, with more airdrops expected to happen over a period of 24 months. In 2018, Do Kwon and Daniel Shin (also known as Shin Hyun-sung) co-founded Terraform Labs in Seoul, South Korea. Terraform Labs raised more than $200 million from investment firms such as Arrington Capital, Coinbase Ventures, Galaxy Digital and Lightspeed Venture Partners.

Become a member of CryptoSlate Edge and access our exclusive Discord community, more exclusive content and analysis. In addition to sell-offs, the numbers also show a decrease in the number of whales. The chart above demonstrates the total transfer volume of coins that were last active between seven and ten years. The chart below, on the other hand, shows the same data for coins that have been stagnant for over ten years. Terra 2.0 will not involve an effort to peg its value to the US dollars. At present, LUNA is not a good investment, but that should not stop investors from doing their research and determining the best course of action.

Situation: You sold Terra or Luna at a loss

UST gets its utility from Anchor Protocol — a decentralized finance application that aims to pay 19.5% APY to stake UST. In theory, they are meant to have a fixed value of around $1 USD so they can be a reliable store of value for investors in contrast to extreme volatility of Ethereum, Bitcoin and others. Since their birth more than a decade ago, the difficulty in determining their real value has caused strong oscillations. In the beginning, the strong revaluations helped support the legend that it was a relatively simple way to multiply your savings. There are unconfirmed expectations about their future use, and certain doses of FOMO among small investors. There are those who believe that the only reason why the value of cryptocurrencies keep rising is that someone else keeps buying them, and others who see in them a reserve that is only in its infancy.

So, for example, when Luna token’s price was $85, you could trade one token for 85 UST. This deflationary protocol was designed to ensure there was long-term growth for Luna. A Luna coin was going for around $116 in April and ended up dropping to a fraction of a penny before being delisted. Before that, the coin went from being worth less than $1 in early 2021 to creating many crypto millionaires within a year. Many success stories popped up in the media about how regular folks were able to get rich from Luna.

  • While 1 TerraUSD is always supposed to be worth exactly $1, the value of Luna can fluctuate.
  • And over the past two weeks, investors have pulled more than $10 billion out of tether.
  • Many experts were skeptical that an algorithm could keep two tokens stable.

UST tracks the price of the U.S. dollar, so a UST token rounds the dollar and gets its peg to the U.S. currency through the use of the ecosystem’s other token, LUNA. In both cases they are native tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea, which allows developers to create their own blockchains and decentralized applications. He also recalled the tragedy of the first-ever algorithmically-backed stablecoin NuBits that collapsed in Q2, 2016; Mr. Younessi was surprised that some teams are still interested in similar designs. In a statement cited by a blockchain veteran Linda Xie, former PM of a cryptocurrency exchange major Coinbase, Mr. Younessi bashed the idea to solely back UST with the LUNA token. Additionally, crypto information sites like CoinMarket Cap are warning investors that the token is extremely volatile and has already lost over 99% of its value. Nonetheless, this caused LUNA’s market cap to continue to fall relative to UST’s market cap, further exacerbating the already high average redemption price of LUNA for UST, and the implications that come with it. Labs Invests in Magic Square, World’s First Crypto App Store

There have been anecdotal reports of self-harm by those who had most of their savings staked in UST — though these can’t be confirmed, it’s clear that a lot of people lost a lot of money in the collapse. The damage isn’t contained to Terra’s ecosystem though, as Fortis Digital’s Boroughs notes. Many who were exposed to luna and UST would have sold off big parts of their crypto portfolio to recoup some of the damage, pulling the entire market down. It’s brought up questions about similar tokens namely Tether, and regulators across the political isle have their eyes set on stablecoins.

luna collapse

Every single crypto project nowadays promises to 1) revolutionise money, 2) disrupt traditional finance, 3) change lives for the better. Curve’s liquidity pools automatically determine the prices of asset pairs (e.g. UST/USDC) by calculating their relative supply ratios. At this point in time, there is a 185 million USDC-UST imbalance, with the pool receiving too much UST at one time. On 7 May, Do Kwon’s Terraform Labs withdrew 150 million UST from Curve’s 3pool liquidity pool as part of a planned and public operation. Removing so much asset value from an otherwise deep liquidity pool makes prices of UST in that pool more volatile.

Stablecoins claim to be a relatively safe haven in the highly volatile crypto market. But the saga proved algorithmic stablecoins, which are a complicated and lower quality type of banking reserve, are just as volatile as other cryptocurrencies. Bearish sentiment in the broader cryptocurrency market resulted in LUNA’s price, like many cryptocurrency investing bible other altcoins, crashing over the last few weeks, essentially putting the market capitalization for LUNA below that of UST’s. Last week, supporters of the Terra blockchain project voted to revive luna but not terraUSD, a so-called “stablecoin” that plunged below its intended peg to the dollar, causing panic in the crypto market.

The US Treasury Secretary, Janet Yellen, has recently made such a request. And the European Union is finalizing regulation that should be ready by the end of the year. Although UST’s price had increased for a brief time, the peg did not hold for long. Many UST holders, still believing in the algorithm, burned UST en-masse to over-mint LUNA tokens in an attempt to defend the peg, or to profit from the arbitrage. The downfall of Luna and TerraUSD offers a case study in crypto hype and who is left holding the bag when it all comes crashing down.

If this plan ever comes to fruition, in theory, 4pool would outpace 3pool’s growth. Essentially, as 1 UST was cheaper than a dollar, the price of minted LUNA was still falling. In effect, the ft guide to exchange traded funds and index funds trader makes 5% of profit since it costs them $1 to mint 1 UST and they gain $1.05 after selling UST. Selling UST increases the supply of UST in the market, which lowers the price of UST.

Even though it was the peak, January was just the beginning of the bull run. Even though whales older than ten years didn’t record annual highs, the chart shows a noticeable electrum cryptocurrency wallet review increase in the sell-offs. Since whales older than a decade can understand the market cycles better than any cohort, their sell-offs indicate bearish sentiment.

  • This caused LUNA to go into hyperinflation, which degraded its value.
  • As a result, many traders tried to take advantage of arbitrage, exchanging 90 cents of UST for $1 worth of LUNA.
  • These generated stablecoins could then be fed into the high demand created by investors wanting to take advantage of the high yield.
  • Even though it was the peak, January was just the beginning of the bull run.

CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG. CoinDesk followed and reported on the rise and the ultimate demise of the Terra ecosystem. On May 7, the price of the then-$18-billion algorithmic stablecoin terraUSD , which is supposed to maintain a $1 peg, started to wobble and fell to 35 cents on May 9.

When was Bitcoin worth $1?

In April 2011, the price of Bitcoin crossed the $1 threshold for the first time. Bitcoin also faced its first competition in the crypto space in 2011. Litecoin (LTC) was launched in October 2011. The Ethereum blockchain went live several years later in 2015.

The IRS allows tax deductions for worthless securities that are considered capital assets. While cryptocurrencies are often capital assets, the SEC has not officially ruled that they are securities. However, a 2017 decision concerning The DAO’s governance tokens and recent comments by SEC Chair Gary Gensler could suggest that in the future, some digital assets may be classified as securities.

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