Why Did Stable Coin UST Crash? Luna Terra Crash of 2022

TerraUSD LunaUSD stable coin
TerraUSD LunaUSD stable coin

The cryptocurrency world has been rocked in recent days by the sharp reductions in the value of a stablecoin named TerraUSD and its sister counterpart Terra Luna. The crisis has shaken the entire crypto market, and other currencies like bitcoin and tether have struggled as a result. Terra Luna is nearly worthless now. Bitcoin has plummeted nearly 25% in the last week, and has dropped more than 50% in the last six months.

What is Stable Coin ?

A stablecoin is a cryptocurrency that is tied to a fiat currency, such as the US dollar or the euro. They are intended to be less volatile than other cryptocurrencies such as bitcoin and ether, which can fluctuate dramatically during the day.

Stablecoins serves as a bridge to the old financial system, operating as a money with a widely accepted value. Stablecoins allow investors to park their funds while remaining within the cryptocurrency ecosystem, avoiding the market’s ups and downs.

Tether, the stablecoin with the greatest market cap, and USD Coin, which was created in collaboration with the exchange Coinbase Global, are two popular stablecoins. A stablecoin pegged to the US dollar should theoretically keep its $1 per token value.

What are TerraUSD and Terra Luna?

While some stablecoins, such as tether, are designed to be backed by assets, others rely on complicated algorithms to keep their dollar peg.

One of these algorithmic stablecoins is TerraUSD. It uses a complicated seesawing technique with a companion cryptocurrency called Terra Luna to try to retain the same value as the US dollar (or just Luna). While one TerraUSD should always be worth exactly $1, the value of Luna can change. TerraUSD essentially uses Luna as a counterbalance to keep its dollar peg. The following is how it works:

TerraUSD is burned or destroyed to mint or generate Luna, and vice versa. Burning one TerraUSD always gives you $1 in Luna, and burning $1 in Luna always gives you $1 in TerraUSD. it is like Seasaw in park where Luna is on one end and Terra is on another , Keeping it balance is the “fancy” Algorithm.

Assume the value of TerraUSD drops somewhat, and it now costs $0.99. Because 1 TerraUSD can always be exchanged for $1 worth of Luna, clever people will jump at the chance to buy something worth $1 for 99 cents and make a 1 cent profit. As a result, they burn TerraUSD to mint Luna and profit.

As more people strive to earn that 1 cent by burning TerraUSD for Luna, the supply of TerraUSD decreases and its price climbs until it reaches its $1 peg.

Imagine that so many people are profiting from the arbitrage that the price of one TerraUSD jumps to $1.01. This indicates that people who own Luna are aware that by burning $1 worth of Luna, they can obtain TerraUSD and profit an extra penny. As more people burn their Luna to make TerraUSD, the supply of TerraUSD grows, and the price of TerraUSD declines until it reaches $1.

So, what happened this week to TerraUSD and Terra Luna?

Essentially, the TerraUSD-Luna balancing act failed.

The Anchor Protocol was the most important reason why the majority of people possessed TerraUSD. Consider Anchor to be a savings account for your TerraUSD, one which earns you 20% interest – a fantastic offer for a savings account.

In recent months, it made sense to simply park TerraUSD in an Anchor account and wait for the 20% dividend, especially because there isn’t much you can do with cryptocurrency. According to Coindesk, 75 percent of the TerraUSD in circulation was placed in Anchor as recently as last Saturday.

Anchor, on the other hand, passed a resolution in March this year to replace the 20% rate with a variable rate. Then, according to the Wall Street Journal, substantial sums of TerraUSD were removed from Anchor over the weekend, causing traders to panic and sell their TerraUSD and Luna tokens. Another set of investors used the Curve Finance blockchain project to exchange TerraUSD for other stablecoins.

People started fleeing by exchanging TerraUSD for Luna. Luna’s supply exploded, leading the price to drop. Luna was pushed off the seesaw in a sense.

As more people attempted to sell their TerraUSD, the balance system failed, and TerraUSD and Luna both plummeted. The stablecoin dropped as low as $0.14 on Friday. Luna has nearly lost all value, falling to less than a penny on Friday.

Do Kwon, the developer of TerraUSD and Terra Luna, proposed a rescue strategy for the collision on Wednesday.

So what is next ?

More Regulations on stable coin for sure, Any stable coin creator need to keep equivalent actual Currency with federals reserve to meet the standards , This might soon be in effect due to recent crash . Issue with this is , investors can’t enjoy 20%+ interest rates which were given by stacking your stable coins. With that use of stable coin is good future of tether who actually uses real USD to back it’s digital currency compare to Terra Which uses Luna or Bitcoin to back it’s Digital dollor.

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