The past few days have not been easy for TerraUSD holders. Luna has halted their network for a second time, and the token’s price is falling fast. In fact, the Luna Foundation Guard has confirmed selling $3 billion worth of Bitcoin in hopes to save the coin. However, the attempt has been unsuccessful.
This in itself is history. Is this current market reversal a fallout, a regular bounce, or has the bottom just settled in?
Luna is a blockchain protocol that uses fiat-pegged stablecoins to power global payments systems. The project was introduced in January 2018 and officially launched in April 2019. It combines the price stability and wide adoption of traditional currencies with the decentralization of Bitcoin (BTC) to offer fast, affordable, and accessible settlements.
Currently, the project that enjoyed a successful start is plummeting, leading to a shaking up in the cryptocurrency world.
We will first understand what stablecoins and TerraLuna are before trying to explain the fall.
TerraUSD – Stablecoin
Stablecoins are cryptocurrencies whose values are pegged on a fiat currency or any other real-world asset, for instance, gold. Essentially, stablecoins solve the volatility that affects digital coins. One of the more popular stable coins is Tether (USDT), who’s value also fell during the market downturn.
In addition, these tokens link to the traditional financial system using currencies with values that many people understand. Investors who want to save their funds within the cryptocurrency ecosystem turn to stablecoins to avoid price fluctuations and volatility.
Terra Luna and TerraUSD
Other stablecoins derive their value from real-world assets. However, TerraUSD relies on complex algorithms to maintain its peg to the US dollar. It uses a complex seesawing mechanism with a related cryptocurrency called Luna to maintain equal value to the US dollar. The value of Luna can fluctuate, while 1 TerraUSD is always supposed to be worth $1.
What has happened to Luna? – Reasons for the Fall
First, the balancing act between Terra Luna and Terra USD broke. Most people held the Terra USD because of the Anchor protocol. Anchor is a good deal for a savings account. Think of it this way, you put your TerraUSD, and it pays you a 20% interest. In the past few months, it has made sense to park TerraUSD in an Anchor account and watch the 20% yield come in.
According to Coindesk, 75% of all the TerraUSD appeared to be deposited in Anchor. In March, Anchor passed a resolution to replace the 20% rate with a variable rate. Traders are worried and began selling their Luna Tokens in the past week after large amounts of TerraUSD left Anchor’s exchange. Another group of investors used a blockchain project called Curve Finance to swap TerraUSD for other stablecoins.
People panicked and started leaving by burning TerraUSD in exchange for Luna. The supply of Luna then ballooned, causing the price to drop, consequently pushing off the seesaw. With more and more people trying to dump their TerraUSD, the balancing machine stopped functioning, leading to the crashing of Luna and TerraUSD. The stablecoin dropped to $0.0002104 (at the time of writing). This has made Luna almost worthless.
Following this meltdown, Binance, the world’s largest cryptocurrency exchange, has halted the trading of Luna on its platform.
TerraUSD: Final Takeaway
Currently, the cryptocurrency market is witnessing the worst drop in the value of a stablecoin. The Terra blockchain was also halted. As a result, new investors must be careful with the token at this moment. On the other hand, the token holders who have recorded massive losses still hope for the market to stabilize and recover from their losses.
