The Terra’s Fall. What Happened, And What Are the Possible Consequences?
The second week of May ended for many crypto traders with an unforgettable tragedy — the fall of Terra (LUNA). Just a week before, the stablecoin entered the top ten most valuable cryptocurrencies with a price of $85 per token. But by May 11, the situation began to change dramatically — the price of LUNA fell to $15, and two days later the token lost 99.98% of its value. At the time of writing, the token is trading at $0.00014.
This also led to the fall of the stablecoin issued by Terra, TerraUSD (UST). The coin lost its pegging to the dollar, which was held at a ratio of 1:1, and its price fell to $0.09.
The Terra ecosystem is governed by two main tokens – UST and LUNA. To create UST, you need to burn LUNA on the Terra Station portal. To maintain the value of UST, the LUNA supply pool either adds to or subtracts from its treasury. Therefore, customers must burn LUNA to mint UST, and vice versa. In other words, these two tokens are inextricably linked.
When both tokens went into steep dives after May 9, protocol co-founder Do Kwon posted a series of tweets on remedial measures to stem the avalanche. Kwon stepped up the UST burn to contain the UST’s fall, but it didn’t work.
Kwon added that by increasing the underlying pool from 50 million to 100 million special drawing rights (SDRs) and reducing the PoolRecoveryBlock from 36 to 18, the protocol’s potential power could be increased from $293 million to $1.2 trillion.
By implementing the above changes, the Terra team was able to mint four times more UST out of thin air, a process now jokingly referred to as Kwontative easing.
The CEO of cryptocurrency exchange Phemex, Jack Tao, told Cointelegraph that the UST and LUNA crash signals have been around for quite some time. In his opinion, algorithmic stablecoins are unreliable because they lack any real backing asset.
And the attempt to make Bitcoin a reserve asset for the UST, when Do Kwon announced the purchase of BTC as a reserve for an arrhythmic stablecoin, only added fuel to the fire, Tao added.
He is sure that buying BTC has led to an oversupply of UST. The token began to rapidly fall in price due to pressure from traders selling assets. The Luna Foundation had to get rid of Bitcoin in order to keep the UST peg to the US dollar, but the selling pressure continued and, accordingly, the assets continued to fall in price.
On May 12, the validators serving the Terra network collectively decided to stop any digital activity related to the ecosystem in order to prevent possible attacks on the management of the network. Terraform Labs on Twitter reported that all network activity was halted at block 7,603,700.
After the price of LUNA fell by almost 100%, a company representative suggested that the developers were no longer confident in their ability to prevent control hacking by third parties. But soon the Terra team announced that they would resume work as soon as validators could apply a patch that disables all further delegations.
Due to the fact that the LUNA/USDT trading pair fell below 0.005 USDT, it was removed by the Binance and Huobi exchanges.
Many investors, large and small, lost billions of dollars in aggregate due to the fall of Terra. Ethereum co-founder Vitalik Buterin even called for the project to prioritize small investors when recovering losses.
But Terra’s CEO Do Kwon is not going to give up. He stated that he intends to recreate the project in order to save the ecosystem
Prior to the development of the above events, UST was the third largest stablecoin by total market capitalization, behind only Tether and USD Coin.
According to Jack Tao, due to the collapse of Terra, investors will begin to study crypto projects much more carefully before making investments. In addition, the legislative system in relation to the crypto industry can be tightened, especially in relation to decentralized stablecoins.
But he also believes that this event may also lead to a kind of cleansing in the cryptosphere – only strong projects will survive.
“There will be much more attention from now on and investors will feel comfortable investing only in the biggest cryptocurrencies like Bitcoin, Ethereum or Solana,” he said.
But there will always be those who want to make quick money and rise on the hype. As such, it will be interesting to see how this story continues to unfold and what impact this incident will have on the development/evolution of the cryptocurrency market as a whole.