Crypto Market Pressure
While all cryptocurrencies have been in the same soup for the last couple of days, suffering from massive pressure given the tightening of monetary policies, soaring inflation, and other macroeconomic factors, the recent Crypto Market Crash appears to be primarily due to the depeg of the UST.
The market capitalization of UST last week was roughly $18 billion, making it the largest algorithmic stablecoin in value. On May 11, it massively dropped to around $4.7 billion.
As part of its defense of the dollar peg, the Luna Foundation Guard said it would sell its $3 billion bitcoin reserves. One UST is equal to $1 worth of LUNA, regardless of the price of the UST. A bitcoin reserve of $10 billion was being built up by the Luna Foundation Guard prior to the crash.
Community Comments $Luna Crash
“Do Kwon (DK) continued the stablecoin backing strategy by purchasing a stack more BTC. Either a major UST whale or multiple smaller UST whales didn’t like this and started closing their positions.
Large withdrawals started on Anchor and left only $300m left in the liquidity pool before the BTC reserves will have to be used.
And with BTC price dropping due to the FED FUD, this increased selling pressure. This started a cascade against UST. Investors became concerned at the prospects of a UST depeg and this tanked the price of the paired token $LUNA.
Many started swapping their UST for other stablecoins, which further dropped $LUNA price.
Then Binance announced no fees on trades between stables which just increased fears that UST would soon depeg.”
What Terraform Labs CEO Do Kwon Says
1/ Dear Terra Community:— Do Kwon 🌕 (@stablekwon) May 11, 2022
Treasury Secretary Janet Yellen discussed TerraUSD, which was developed in South Korea, as well as the volatility of stablecoins during testimony in front of the Senate Banking Committee on Tuesday.
“I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability,” Yellen said.
Yellen and Republican Sen. Pat Toomey from Pennsylvania then discussed pushing forward regulations on stablecoins before the end of the year.
Stable Coins About to Collapse?
But it’s still unclear whether regulations would improve stablecoins or simply cause many of them to go out of business and evaporate entirely.
Other stablecoins like Tether, the largest in the world, are arguably just a house of cards waiting to collapse when you take a look at the math, as reputable news outlets like Bloomberg News have done in recent months.
You do not, under any circumstances, “gotta hand it to Luna.” In fact, you probably shouldn’t hand it to Bitcoin either if you want to make it out of 2022 with some cash in your pocket, said Yellen.
At least 40% of bitcoin investors are currently underwater, according to Yahoo Finance. And it’s not looking to get better anytime soon.
What is Terra $LUNA?
The official Terra documentation has this to say about the Terra Protocol:
“The Terra protocol is the leading decentralized and open-source public blockchain protocol for algorithmic stablecoins.
Using a combination of open market arbitrage incentives and decentralized Oracle voting, the Terra protocol creates stablecoins that consistently track the price of any fiat currency.
“Users can spend, save, trade, or exchange Terra stablecoins instantly, all on the Terra blockchain. Luna provides its holders with staking rewards and governance power.
The Terra ecosystem is a quickly expanding network of decentralized applications, creating a stable demand for Terra and increasing the price of Luna.“
As for the protocol’s two main tokens, it says:
- Terra: “Stablecoins that track the price of fiat currencies. Users mint new Terra by burning Luna. Stablecoins are named for their fiat counterparts. For example, the base Terra stablecoin tracks the price of the IMF’s SDR, named TerraSDR, or SDT. Other stablecoin denominations include TerraUSD or UST, and TerraKRW or KRT. All Terra denominations exist in the same pool.“
- Luna: “The Terra protocol’s native staking token that absorbs the price volatility of Terra. Luna is used for governance and in mining. Users stake Luna to validators who record and verify transactions on the blockchain in exchange for rewards from transaction fees. The more Terra is used, the more Luna is worth.“
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