The Terra ecosystem and its native token, the Luna, have been in the news for the past few days. The LUNA token has crashed over 99% and seems unable to recover. Alongside it, the stablecoin UST can no longer regain parity with the dollar. It is the entire Terra ecosystem that now seems doomed.
What is the Terra Project?
Terra is a blockchain project , a solution similar to Ethereum allowing the creation of smart contracts (smart contracts that occur when certain conditions are met) and decentralized applications. These include decentralized finance, lending and borrowing protocols that are very popular in the crypto ecosystem.
Blockhain founded by Terraform Labs in 2018, a Seoul-based company, this project has two major tokens at the heart of its ecosystem. First of all, the native token of the ecosystem, the LUNA. It is the one used to pay transaction fees on the blockchain as is customary in the field. It had a stellar 2021 and start to 2022 trading as high as $119.55 during its All Time High . As a reminder, its launch price during the ICO was only $0.80 and it was only $1 in January 2021!
LUNA quickly became the 6th largest capitalization in the crypto market . It has established itself as one of the most promising projects in the sector. With Solana or Avalanche, the project was often cited as one of the most promising ecosystems in the crypto sphere. The founder Do Kwon has also become an atypical and charismatic figure in the crypto universe, often criticized for his arrogance and his mocking tweets.
At the heart of its ecosystem, we also find the house stablecoin named UST . The latter is indexed to the value of the dollar like the USDT or the USDC. The major difference is that it is algorithmic unlike the two examples mentioned above. To guarantee the value of the latter in relation to the dollar, a LUNA and UST burn mechanism is put in place to always balance supply and demand.
It is an innovative model of stablecoin which should not require as much collateralization as traditional models but it is also a new system of which we do not control all aspects. This is what has led to the downfall of Terra in recent days . Terraform Labs still had some reserves, especially in Bitcoin to guarantee the peg of the UST in case of problems. Nearly 3.5 billion BTC was available to prevent this kind of crash.
The UST is at the heart of decentralized finance on Terra through the Anchor protocol. It was one of the most popular DeFI protocols in the crypto sector since it offered an annual return of almost 20% on the UST stablecoin. A tempting promise that has attracted many retail investors. But also institutions and companies looking for attractive returns. This is the case of the French company Just Mining which revealed to be exposed to the UST and presented an emergency plan to these customers this week.
Despite the precautions, it seems that the innovative nature of this stablecoin has dragged the entire ecosystem down.
A LUNA THAT CAN BE BOUGHT IN PENNIES, WHO WOULD HAVE BELIEVED IT!
Why LUNA collapsed?
LUNA has seen a dramatic drop in recent days and is currently trading around $0.20 . A ridiculous sum compared to the heights reached a few weeks ago. So how did we get here?
For some like the founder of Cardano, Charles Hoskinson, Terra suffered an attack highlighting the intrinsic flaws in its functioning.
According to him, an institution borrowed 100,000 Bitcoin from the Gemini exchange. They would then have exchanged a large part of the BTC against UST, outside the market (over the counter) with Do Kwon for a reduced price. He gave his consent, which reduces the liquidity of the UST.
This institution would then have sold and dumped a large amount of BTC and UST on the market. This would therefore have caused a cascade of liquidation on the long positions in leverage in particular, slippage (difference between prices) and panic selling by investors. Many would have sold their LUNA and unstaked their UST in particular on Anchor to sell them.
This tweet therefore presents Terra as a Ponzi who would not have had enough BTC in reserve, despite his recent purchases, to prevent such a crash. None of these accusations have been verified and Gemini denies having granted such a loan. However, such manipulations exist in the crypto market. Some observers believe that Terra was the last victim.
Charles Hoskinson later tweeted that even if Gemini was right, Terra had indeed been the victim of an attack. For the time being difficult to know the truth… Speculation is going well and the next few weeks will surely bring us new elements.
The only certain thing for now is that the UST and the LUNA do not seem ready to recover from this descent into hell. These events seem to have already entered the history of the young crypto-currency market. They will certainly mark a turning point in its development.
Should you still buy LUNA?
Terra Luna was clearly one of the hottest cryptocurrencies in the market in 2021. And to say, it gained around 14,000% in the year 2021.
This explosion in value shows how optimistic investors have been about Terra Luna. Even if the crypto is currently experiencing a most considerable drop, the crypto has already been able to recover. Indeed, the crypto fell more than 50% in early 2022 .