Terra Luna: An Introduction
Terra Luna is a cryptocurrency token that was launched by the Terra community in July 2019. The Terra Luna token is the native token of Terra, a blockchain that was developed by a Korean-based firm known as Terraform labs. The token which was formerly known as Terra Luna $LUNA is now known as Terra Luna Classic $LUNC. The asset is now famous for the crypto crash that occurred in May of 2022: the token which sold as high as $80 per $LUNA is now currently $0.0001074 per $LUNC on CoinMarketCap as of the 20th of July 2022.
Terra as a platform was built with the intention of offering users the stability of fiat currencies while harnessing the power of blockchain technology for settlements that were faster and cheaper than the regular payment solutions. The Terra Luna token was widely accepted because it was backed by its algorithmic stablecoin sister token which is known as the Terra Classic USD $UST. In December 2021, Terra overtook the BNB smart chain to become the second largest DeFi protocol with more than $20 billion invested in the network across its applications. At some point, $LUNA sold for over $100 until the May Terra Luna crash that shook the world of cryptocurrency, leaving many in heavy financial losses.
Table of Contents
- How Terra Luna Works
- The Terra Luna Crash 1.0
- The Terra Luna Crash 2.0
- Speculations: What Happened To Terra Luna?
- The Impact of The Terra Luna Crash
How Terra Luna Works
Terra is a Cosmos-based protocol that powers a group of algorithmic stablecoins which are designed to maintain their pegs with the LUNA token. One of these algorithmic stablecoins is the Terra Classic USD which maintains its peg to the US dollar through a network of investors that buy the Terra Luna Classic token. The way it works is that before you buy UST, you have to mint some $LUNA. You pay the going rate in $LUNA and the LUNA tokens are burnt. The supply of $LUNA is reduced and the price goes up. On the other hand, if you want to mint LUNA, you convert $UST coins. The stablecoins are burnt and the price of $UST goes up.
The profits from the variation in prices of the Terra Luna Classic token and its sister token the Terra Classic USD goes to the arbitrageurs on the Terra network. Apart from helping the maintain $UST peg to the US dollar, Terra Luna serves the key function of being the payment method used for transaction fees in the Terra network’s gas system. This makes $LUNA a utility token on the Terra ecosystem. In addition, the Terra Luna Classic token can be staked for a profit. Apart from the profit that $LUNA gives its holders, it enables them to create and vote on different proposals with changes regarding the Terra protocol.The Terra Luna Classic token also serves as a regulatory mechanism for the demand of stablecoins that are pegged to the token.
Terra Luna Crash 1.0
In May 2022, social media platforms like Reddit and Twitter were on fire with comments from crypto holders and analysts. The Terra Luna Classic token which was then known as Terra Luna had crashed from a price of over $100 per $LUNA to less than $1. The Terra Luna token had a large market cap and was considered a worthwhile investment by holders until sometime between the 11th and 12th of May 2022. The unexpected happened: within 48 hours, $LUNA crashed from $120 to $0.02. This was a significant record of loss in the crypto industry. There was a 99.9% correction and subsequently, $LUNA dropped to reach $0.00000112 against BUSD, the last trading pair to be delisted by crypto exchanges.
When $LUNA crashed, its sister token $UST was depegged with its value diving from a dollar to a few cents. On the 12th of May 2022 by 8:00 UTC, Binance Futures announced the delisting of $LUNA and automatic settlement of perpetual contracts. Binance Futures also updated the margin tiers of the USDT-Margined LUNA contracts and reduced maximum leverage to 8x. The popular exchange platform also temporarily suspended the withdrawals of $LUNA and $UST. In the days that followed, the CEO of Terraform Labs by the name of Do Kwon proposed a solution for the depegging of $UST and devaluing of $LUNA. A $1 billion $UST burn would decrease the supply of UST and restore the stablecoin’s peg. In the meantime, more people were buying $LUNA partly because they believed in the ability of the token to bounce back and partly to reduce their financial losses.
The Terra Luna Crash 2.0
Terra Luna Classic would crash again, although this time with less effect. The $UST burn didn’t prove to be completely effective in getting the token back to $1, so Do Kwon announced a new plan. Terra Luna would have a new version known as Terra Luna 2.0 ($LUNA) while the old version would be known as Terra Luna Classic($LUNC). A $LUNA airdrop would also be conducted to reward old holders. Terra Luna 2.0 launched on the 28th of May 2022 and recorded falls in price over the next few days. $LUNA reached its peak at a price of $19.53 and subsequently collapsed to about $4.39 some hours later. In May, the price bounced back to $5.90 but with a consequent loss of trust in Terra Luna.
Terra Luna as of June 2022 dropped significantly to $3.30 from a high of $4.50. According to a FX Street report, there were indications that the token could go as low as $1.20 if it printed a sustained four-hour candlestick close below the $3.30 level. This analysis was based on a Fibonacci retracement indicator. The analysis turned out to be close to the truth: as at the 22nd of July 2022, the Terra Luna is valued at $1.93 per token on CoinMarketCap. This is a significant loss for a token that once sold for almost $20 and the reason why the Terra 2.0 crashed is clear. Investors lost trust in the token and sold their airdrops, even at low rates. There were many speculations about the crash and fewer people were willing to put their money in $LUNA and $LUNC.
Speculations: What Happened To Terra Luna?
There are so many speculations about how Terra Luna crashed, but one major speculation is that there were massive sellouts of the Terra Classic USD $UST. Going by that theory, in early May there were some large $UST withdrawals on the Terra ecosystem. These withdrawals increased the supply and brought the price of $UST down. As the price of $UST lowered, investors panicked and began to sell. As $UST was sold, $LUNA was minted and the price of the token fell drastically. The Terraform Luna was constantly being produced to keep $UST steady in price, but in the long run, both tokens crashed.
There are some speculations that Terra Luna and the Terra Classic USD model are not sustainable. The Terra Classic USD $UST is an algorithmic stablecoin that depends on $LUNA to maintain its peg to the US dollar. In theory, $1 of $LUNA is supposed to be exchanged for $1 worth of UST. However, when market volatility forces are in place for algorithmic stablecoins, crashes are bound to happen. This is because instead of being backed by cryptocurrencies or fiat currencies, stablecoins like UST depend on the forces of demand and supply. $LUNA as a token was affected because its price was dependent on the value of $UST.
The Impact of The Terra Luna Crash
The Terra Luna crash shook the crypto industry: many lost their life savings and there were reports that some investors were suicidal and hiding from their friends whom they convinced to invest in $LUNA. Investors saw their money move from thousands of dollars to a few cents in the space of a few days. Terra Luna had a value of over $40 billion but today it has lost value and trust of investors. More than 2000 investors filed a class action lawsuit against Do Kwon and the US Securities and Exchange Commission opened its own investigation into the matter. In South Korea, the investigation of Terra Luna’s collapse is being led by a special financial crimes unit with the prosecutor’s office in Seoul. Former employees of Terraform Labs in South Korea are banned from leaving the country during these investigations.
The Terra Luna crash was a defining moment in the world of cryptocurrency: it drove home the point that cryptocurrency in any form would always be volatile. Investors who believed in the ability of $UST to remain pegged to the US dollar lost faith in $UST and became more wary of Tether $USDT. The suspicion that not all stablecoins are actually backed by reserves resulted in less trust for cryptocurrency stablecoins and tokens in general. Cryptocurrency critics had a field day describing cryptocurrency as a Ponzi scheme in which investors had been played, not once but twice with Terra Luna. The cryptocurrency industry as a whole suffered, losing investors and over $400 billion in value in terms of crypto market capitalization.
Disclaimer: This article is written based on research and timelines of events. No personal opinion of any HackerNoon staff was employed in the course of article documentation. If you intend to get involved in any cryptocurrency investment, do your own research before purchasing any token or stablecoin.