Everything You Need to Know About the Terra/Luna Stablecoin Crypto Crash (2024)
by L VM
TerraUSD (UST) lost 1:1 peg with $USD.
The Luna Foundation Guard (LFG) sold billions in Bitcoin in attempt to defend peg.
The selloff in Bitcoin by the LFG precipitated wider crypto market crash which made problem worse.
The only way this could have worked is if the Luna Foundation Guard had enough liquid funds to absorb the entire selling supply of UST that initiated the cycle.
TerraUSD (UST) lost it’s one-to-one peg with the US dollar beginning May 5, 2022 causing a chain reaction as the Bitcoin reserve used to hold the 1-to-1 peg was force-sold in the market. This in turn drove down the price of Bitcoin which affects the price of every crypto currency since it is used as the reference asset for the crypto market.
Terra is an algorithmic stablecoin platform whose two primary coins of note are:
TerraUSD (ticker: UST)
Terra (ticker: LUNA)
Traditional stable coins, such as Tether, are designed to hold $1 USD for every $1 digital coin. When demand for Tether is high (people want to buy Tether and pay in US dollars), then new Tether coins are minted and cash is deposited into Tether’s treasury. For every new coin minted, a new US dollar is deposited. When supply for Tether is high (people want to sell Tether and receive US dollars), then Tether can be burned and US dollars withdrawn from the treasury.
Algorithmic stable coins such as UST, operate on a different principle that at its core requires decentralized trust and widespread use of UST. When demand for UST is high (people are buying UST and pushing its price over $1 USD), then new UST is minted through “burning” the LUNA coin, which increases the supply of UST and decreases the supply of LUNA. When supply for UST is high (people are selling UST for less than $1 USD), then UST is “burned” and new LUNA is minted, which decreases the supply of UST and increases the supply of LUNA.
The minting and burning is all done by arbitragers reacting to the over or under supply of UST in the marketplace. When the arbitragers see UST trading at $1.01 or higher, they get to work by swapping $1 worth of LUNA for 1 UST. They then take that UST and sell it on the market for $1.01. This makes them a 1% return in a matter of minutes. This is a very good return and a great incentive. Just think, if someone is looking to buy 1,000,000 UST at $1.01, for $1,010,000 and the arbitrager can buy UST at $1.00 for a flat $1million, they can make $10,000 in a very short amount of time.
Similarly, when arbitragers see UST trading at $0.99 or lower, they can purchase 1 UST token in the market for $0.99 and then use the Terra platform to swap that for $1 worth of LUNA and then go and sell that LUNA in the market for $1.00, again making 1% return.
This should work, right? Supply and Demand and all that?
Well, what happens when you have many people wanting to sell UST all at the same time? The supply of LUNA is going to skyrocket as the arbitragers rush in to defend the UST peg by buying massive amounts of UST (from the large group of unexpected sellers) and swapping those for LUNA which mints new LUNA and burns the swapped UST. This will reduce the price of LUNA now that there are many more LUNA tokens in circulation. If the supply of LUNA is increased by a significant amount, then a corresponding significant price drop can occur, ultimately approaching $0.
As the price of LUNA drops, there will be a point where there are simply no buyers of LUNA left in the market, which means there is nobody for the arbitragers to sell to, which means there is no arbitrage activity, which means there is no way to defend the UST peg algorithmically.
It looks like this scenario unfolded this week, and in an effort to defend the UST:USD peg, LUNA was artificially propped up by the LUNA Foundation Guard which had a treasury of some $4.5 billion in Bitcoin that they partially liquidated in order to generate funds with which to buy LUNA from the arbitragers.
So, in short:
In order to defend the UST peg, the arbitragers needed buyers of LUNA.
The LFG sold billions worth of Bitcoin to fund purchases of LUNA from the arbitragers.
The LFG Bitcoin selloff drove down the whole crypto market, generating a vicious cycle.
The only way this could have worked is if the LFG had enough liquid funds available to purchase all the LUNA needed to satisfy the arbitrage requirements of the market during the original selloff of UST.
Our analysis suggests that it was not the result of targeted market manipulation by a single entity, but rather stemmed from growing concerns about the sustainability of the system. At the center of the collapse was Terra's algorithmic stablecoin, UST, and a blockchain-based borrowing and lending protocol, Anchor.
Will Luna ever recover? The future of LUNA remains to be determined. While the cryptocurrency market has witnessed recoveries from downturns in the past, LUNA's specific challenges make its path to recovery less clear.
On May 7, 2022, a series of trades on a protocol deployed on the Ethereum network, Curve, de-pegged UST's price in decentralized exchanges (DEXs), eventually causing market-wide sell-offs of UST and LUNA and leading to the collapse of the network.
The catastrophic collapse of Luna and UST on May 7, 2022, was a series of unfortunate events that started with an unprecedented unstaking of UST. Over $2 billion worth of UST was rapidly taken off the Anchor Protocol, causing a cascading effect that would ultimately lead to the downfall of both UST and Luna.
According to some analysts, the maximum price LUNC could reach is projected to be around $0.000135 in 2023, $0.000304 in 2025, and $0.000739 in 2030. These projections are based on current market trends and the assumption that the burn program and community support continue to drive the token's potential recovery.
Traders of Terra's LUNA tokens suffered some of their biggest weekly losses in recent months as prices fell 99.7% in a week, data shows. The LUNA price fell 96% in the past 24 hours alone, pushing it to less than 10 cents. That's down from about $60 earlier this week and a record $120 in mid-April.
In general, there exists a theoretical possibility that LUNC might perhaps achieve a value of $0.01 in the future, however this outcome poses a significant obstacle. Despite a burn rate of 90% and an annual price rise of 50%, the projected timeframe for the value to reach 1 cent ranges from six to 10 years.
1. Dogeverse – A Multi-Chain Doge Token Expected to Boom in 2024. Dogeverse ($DOGEVERSE) is a multi-chain doge-based token. With the ability to “hop” between different networks, eager investors can purchase $DOGEVERSE on six major blockchains, from Ethereum, BNB Chain, and Polygon to Solana, Avalanche, and Base.
ALSO READ: Why Did LUNA Crash? Kwon has been under investigation for alleged fraud and tax evasion after investors in TerraUSD and Luna filed complaints against him last May, accusing him of a Ponzi scheme. He has been accused of providing false information to investors and violating capital market law.
In May 2022, the Terra blockchain was temporarily halted after the collapse of the stablecoin TerraUSD (UST) and Luna, an event that wiped out almost $45 billion in market capitalisation within a week. On January 21, 2024, the company filed for bankruptcy.
In May 2022, LUNA saw one of the most disastrous price crashes in the history of the cryptocurrency market. The price of LUNA, which hit an all-time high of $116 on April 6, was as low as $0.00008 by June 6. The LUNA crash caused billions of dollars of losses for investors, leaving many to wonder what happened to LUNA.
TERRA LUNA Classic Price Prediction 2023, 2024, 2025: Will LUNA Recover To $1? LUNA price might hit a maximum of 0.92 by the end of 2023. Terra LUNA 2.0 price with a potential surge could go as high as $4.59 by the end of 2030.
Its market cap, which was around $18 billion in early May, now stands at $770 million. It's worse for luna holders. The value of luna tokens has almost completely disappeared: After reaching a high of just under $120 in April, luna's current price is less than a fiftieth of a penny.
Per our technical indicators, the current sentiment is Neutral while the Fear & Greed Index is showing 72 (Greed). Terra recorded 12/30 (40%) green days with 24.34% price volatility over the last 30 days. Based on the Terra forecast, it's now a good time to buy Terra.
Terra Classic implements a 0.5% tax on LUNC transactions to reduce supply and reduce the hyperinflated supply of LUNC. A short to medium-term recovery to $1 seems improbable, with the CoinCodex prediction suggesting an increase to $0.000130 by June 2024.
Why did Terra Classic crash? In the space of just one week in May 2022, UST and LUNA failed to maintain their peg against the U.S. dollar and plummeted dramatically, losing nearly 99% of their value. There were multiple reasons behind the crash, which caused investors to lose a total of around $60 billion.
Terra Classic (LUNC) is the continuation of the old Terra (LUNA) coin, which collapsed in May 2022. It aims to repeg the USTC stablecoin to the dollar. Its founding company, Terraform Labs, filed for bankruptcy in January 2024. One Terra Classic price prediction says it will reach $0.000743 next year.
Introduction: My name is Aron Pacocha, I am a happy, tasty, innocent, proud, talented, courageous, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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