In the midst of the general fall of the cryptocurrency market, there is one that has caused panic in investors by its resounding collapse: Terra (Moon).
The Terra protocol, used for stablecoins (stablecoins) backed by fiat money (dollars, wons, etc.), has seen the absurd fall in the value of its Luna cryptocurrency, reaching only 2 dollars from the 50 dollars in which it was.
The fear with this project is not unjustified. Luna peaked just a few months ago, reaching $116 in April. And in a matter of weeks, it’s no longer worth much, going from the top 10 market cap to being ranked 30th, according to CoinMarketCap.
The problem with Terra is the launch of a new cryptocurrency called Terra USD (UST), which sought to have a value set at one dollar. Unlike other stablecoins such as BUSD or USDT, instead of backing cryptocurrencies in real dollars, Terra backed them up with investments in bitcoin.
This detail is not minor, since the value of bitcoin has fallen sharply in the market during the last months, having as a peak the decrease of almost 10% at the beginning of the week.
UsTs were also generated algorithmically in relation to investments in Luna. This works like this: in the face of a fall in their price, the algorithm exchanges their tokens for Luna and burns circulation UST coins, which can be compared to destroying money. In case the price goes up, the process is the other way around.
Therefore, the value of the “stablecoin” was pegged to two other volatile cryptocurrencies under the tutelage of the Terra Foundation.
So, in the midst of the general fall, Terra has suffered two setbacks. On the one hand, with the fall in the value of Luna, new UST coins have been created, which causes a disparity and generates inflation, causing each token to be worth much less than a dollar: UST is currently worth 50 cents, falling to 30 cents at some times in the morning.
“The Terra USD (UST) stablecoin has been under immense pressure recently and there are no signs of this abating. We are seeing an unprecedented situation in what used to be the third largest stablecoin with over $18 billion in market cap, bringing it down to just over $7 billion,” notes Derek Lim, head of crypto knowledge at Bybit, one of the fastest growing cryptocurrency exchanges in the world.
This process has had a domino effect, causing the support in Luna to continue to decline and investors to withdraw their money, increasing the crisis amid the general fall of the market. With less value in Luna cryptocurrencies, new USTs are created and this value will continue to decrease. Given this, the Terra Foundation is selling its bitcoins at prices lower than those purchased to try to calm the situation in both formulas.
“UST is an algorithmic stablecoin, which means its value is tied to an arbitrage system. In recent days, the system was unable to keep up with the sudden large selling pressure, which caused the value of UST to decouple, resulting in a cascade of liquidations and panic selling,” Lim said.
It’s the worst time for Luna and for UST, but this hasn’t been entirely chaos for new investors. For example, many people entered the lowest peaks of UST, when it was worth 30 cents and managed to cause it to rise up to 50 cents and make quick profits. However, in the case of Luna, the trend does not seem to be reversed.
“Other stablecoins like USD Coin and Tether (USDT) are collateralized. This means that they are backed by a traditional-style treasury, in the hands of a centralized company, so there is little risk of contamination. For now, it seems that this situation is contained in UST, LUNA (Terra’s native token) and the projects immediately associated with both, “says the specialist.
Terra was founded in January 2018 by Daniel Shin and Do Kwon. The two envisioned the project as a way to drive rapid adoption of blockchain technology and cryptocurrency through a focus on price stability and ease of use. Kwon took over as CEO of Terraform Labs, the company behind Terra.
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