The 4th Biggest Crypto to Zero |
| Credit: Barron's |
OVERVIEW
• TerraUSD and LUNA are two native tokens of the Terra network, a blockchain-based developed by Terra Labs in South Korea project
• It is a framework that allows developers to create custom blockchains and build their own decentralized applications on top of Terra for various use cases
• Last week, Terra Luna (world's fourth largest cryptocurrency) plunged to zero
• The Luna's market capitalization has dropped to 99.9% i.e. from around $40 billion to around $6 million
STABLE COINS
• A stablecoin is a cryptocurrency designed to be pegged to another asset, like the US dollar or the euro. They are meant to be less volatile
• There are two types of stable coins- One's that are backed by hard cash i.e. for every $1 issued in crypto, there is another $1 put in some bank account regulated by central bank like Tether
• The other involves use of algorithms, but instead of dollars, it will be backed by another cryptocurrency worth of $1. like Terra UST
1 TerraUST= $1 worth of Luna
TERRA UST AND LUNA
• While 1 TerraUSD is always supposed to be worth exactly $1, the value of Luna can fluctuate
• Suppose the value of TerraUSD falls slightly to $0.99. Because you can always exchange 1 TerraUSD for $1 worth of Luna
• Smart people will immediately take the chance to buy something worth $1 for 99 cents, and earn a small profit of 1 cent. So they burn their TerraUSD to mint Luna and earn a profit
• As more and more people holding TerraUSD try to earn that 1 cent of profit by burning it for Luna, the supply of TerraUSD reduces and its price rises until it hits its $1 peg
HOW THE CRASH HAPPENED
• The biggest reason that most people held TerraUSD was because of something called the Anchor Protocol
• Think of Anchor as a savings account for your TerraUSD, but it pays you 20% interest - which is a really good deal for a savings account
• Recently, 75% of all the TerraUSD in circulation was deposited in Anchor, according to Coindesk
• But in March this year, Anchor passed a resolution to replace the 20% rate with a variable rate
• Large amounts of TerraUSD were withdrawn from Anchor, worrying traders and prompting them to sell their TerraUSD and Luna tokens
• People started heading for the exits by burning TerraUSD in exchange for Luna.
• The supply of Luna ballooned, causing the price to plummet from over $119 to $0.00008 something.
• Luna's price tanked by 99.9% - To keep up with the fall in price and ensure stability in UST, they had to mint more Lunas.
• In fact, the number of Luna tokens in circulation went up from 343 million to more than 6.5 trillion in just a week
• The balancing mechanism stopped functioning TerraUSD crashed, and so did Luna. The stablecoin plummeted to $0.14
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