The Terra (LUNA) crypto coin faced a remarkable unusual bearish trend between 11th to 12th May 2022. The Terra (LUNA) made a whopping downturn from $120 to 0.02 which is about 99.9% devaluation which happened in just 48hours.
Considering the S&P 500 index moving down under the 4,000 level for the first time since May 2021, and Bitcoin price moving down to $25,200, altcoins are often pegged to Bitcoin’s strength or weakness.
However, the real reasons for the LUNA crash are more complex and deeper than this and a good indication of the unforeseen crypto price volatility. Amidst all that happened, some investors are considering buying the dip on Bitcoin, as well as Terra (LUNA).
What Is Terra LUNA?
If you are still wondering what Terra Luna is all about, I want you to know that you are not alone. Of course, the name sounds strange and will definitely raise a lot of questions.
Terra is the name given to the crypto asset while LUNA is just its ticker symbol.
Technically Terra is the name of the crypto asset, and LUNA is its ticker symbol.
People often say “LUNA crash” instead of “Terra crash” so as not to confuse it with stablecoin TerraUSD(UST) even though UST crashed too despite being a stablecoin.
The origin of both Terra(LUNA) and TerraUSD(UST) can be traced to Terraform Labs which was founded in 2018, its location is in Seoul, South Korea. The whole story about Terra(LUNA) revolves around Terra Labs CEO Do Kwon.
Let’s have a little insight into how it all started.
Terralabs failed to realise that the idea to create an “algorithmic stablecoin” where Luna could be burnt to mint TerraUSD(UST) to keep it stable in case it loses its 1:1 peg to the dollar and vice versa, is quite different from the functionality of other stablecoins like Tether(USDT) and USD Coin(USDC).
For example, if UST hit 0.99, a small amount of LUNA would be burnt, and if it hit 1.01, a small amount of UST would be burnt. It worked for some time until it failed.
Funds of about $32m were raised through the private sale of LUNA coins to finance this project.
Many big decentralised platforms like Binance, OKEx and Huobi invested heavily in this project.
LUNA was finally launched in 2019 and held the prestige of one of the most successful DeFi coins such that at one point in time, CoinMarketCap ranked Terra(LUNA) the seventh-largest DeFi coin by market capitalisation.
Unfortunately, since its recent crash on 12th May 2022, it ranks 213th position as of the time of writing this.
How Does Terra LUNA Work?
The Terra LUNA coin was designed to function with the aid of a dual token system. TerraUSD(UST) and LUNA were the two tokens deployed to make this system functional.
The primary purpose of the Terra blockchain is to create and design stablecoins and tokens that possess the dual characteristics of the decentralised nature of cryptocurrencies with the stability of fiat money. That is to say, stablecoins and tokens that are decentralised as cryptocurrencies but yet, have the stability of fiat money.
USTs are minted by burning LUNA and can also be swapped for LUNA.
For example, if the UST value goes above $1, the equivalent value of LUNA would be burned, which mints more UST, making it less valuable. Whereas, if the UST price drops below $1, they are traded for LUNA, which in turn makes UST more valuable.
This relationship had been described in relation to the moon and earth since their stability depends on each other. Maybe that is the origin of the name “Luna” which means “resembling the moon”.
Burning the LUNA coin is essential as it gives users some incentives by giving LUNA its value and stabilising UST.
There was a limit of one billion LUNA coins in circulation before its crash in May 2022. If this number of LUNA coins was exceeded, it meant burning more LUNA. However, as of 23rd May 2022, LUNA had exceeded that amount to a whopping supply of 6.5 trillion according to CoinMarketCap.
You may now begin to understand where the problem came from but could this be the real reason why LUNA crashed? Even if LUNA supply exceeded 1 billion coins, why?
Why Did LUNA Crash?
Rumours have it that the 30-year-old Terralabs CEO, Do Kwon had a penchant for arrogance on Twitter, in fact, it was a reputation accrued to him in some circles, so people envisaged the tragedy to be a personal attack.
A theory, though now deleted, was propounded by Charles Hoskinson, founder of Cardano.
He alleged in a tweet that 100,000 Bitcoin was borrowed from Gemini exchange by a large institution who later exchanged that same amount of BTC for UST over the counter(OTC) with Do Kwon, at a discount. He was said to agree, as UST liquidity was reduced.
The institution allegedly dumped large amounts of the BTC and UST on the crypto market and this caused a liquidation stream of leveraged longs and panic selling by some investors. Many of these investors sold their LUNA holdings which caused them to reverse their stake on the UST.
The tweet further alleged that Terra was just a Ponzi scheme with little or no BTC reserves available to prevent the crash.
None of these claims came from a verified source and Gemini has denied the issuance of such a loan.
However, market manipulation is very common in all financial markets.
Will LUNA Ever Recover?
To imagine that LUNA pumped over a hundred multiples from the lows of $0.00000112 but is not yet close to making a recovery is worrisome.
The current LUNA price a week after the crash is $0.00018.
It may be impossible for LUNA to rise to its former glory again, unless a hyper-inflated circulating supply of LUNA which is now about (6.5 trillion) LUNA coins is burnt.
The LUNA market cap will toss Bitcoin which has about $578 billion market capitalisation before the LUNA price can even get to $0.09
LUNA can only get to its former market cap of $40 billion at a LUNA price of $0.006. This figure is a result of multiplying the LUNA crypto token price by the supply in circulation.
