What Happened Behind the Collapse of Terra Luna?
The Luna crypto exchange, which was previously in the top 10 crypto money ranking, saw a decline of over 99.9%. Last week’s Luna crypto crash saw the Terra Luna cryptocurrency fall to an entirely new low and fell sharply in terms of pricing as it lost its stablecoin TerraUSD (UST).
At the time of this writing, Luna’s price has fallen by 99.9% and is currently at $0.0024. The UST is down 85% at $0.14. With this collapse, there was also talk of a Luna being removed from the list.
So, while a Luna recovery plan is being worked on and even a Luna fork is being discussed, what has forced Luna and TerraUSD prices to fall for the first time?
What happened to Terra Luna?
The Luna crypto crash comes from the Terra ecosystem’s connection to its algorithmic stablecoin, TerraUSD (UST). UST is an algorithmic stablecoin and is run through computer codes that help maintain price balance. The process involves burning or minting LUNA/UST to protect the price of these coins.
When a UST is pressed, $1 Luna is burned, while this also happens and vice versa for Luna printing and TOPT burning. Since UST threatens to fall below its fixed price, its owners will sell (or burn) their UST for $1 Luna and make a slight profit. This incentive tries to happen until it rises above $1.
After a large amount of UST was emptied, the stablecoin began to depeg. In a mass panic, more USTs were sold, more Luna were minted, and the supply of circulating Luna increased. This had the knock-on effect of lowering Luna’s price.
This circulating supply inflation has increased substantially since the crash. Previously, the circulating supply was around 345 million Lunas. According to analytics data, it was 3.47 billion Luna on May 12. As of May 13, the difference was 6.5 trillion Lunas.
The Luna Foundation Guard (LFG) was buying Bitcoin to save UST from depegging. However, in the midst of the gradual crypto meltdown, this practice did not work. Aside from these issues, several crypto exchanges, such as Binance, have removed Luna and UST pairings from the list. It has also become common for them to suspend trading ahead of the weekend. Luna’s Do Kwon released a rescue plan for Luna that seemed to have a temporary effect on the overall feeling. Luna briefly rose to $4.46 before dropping below $1 once again. Immediately after this rise, it fell below 1 cent.
However, going into May 16, Luna saw a gradual price increase from a low of $0.0000009 to $0.0002. It fell 18.5% in 24 hours, a slightly more stable day compared to 99% drops. After its market capitalization fell to $58 million, it similarly turned into billions of dollars.
At the time of its release, Luna was ranked 49th by market capitalization. It was the largest cryptocurrency. He was previously outside the top 1,000.
Luna’s Impact on the Crypto Market
The Terra Luna crash seems to be both a symptom and a instigator of some of these massive cryptocurrency price drops. After Luna Foundation Guard and Do Kwon bought nearly $3 billion worth of BTC, the success of the Terra ecosystem became broader and more connected to the cryptocurrency market through Bitcoin.
With LFG and other market makers forced to sell these Bitcoin reserves in an attempt to stop UST depegging, this created a ripple effect on the broader market, seeing Bitcoin fall below $30,000.
However, the crypto market now seems to be bouncing back to Bitcoin’s price of $30,000 and Ethereum’s rise above $2,000. But the cryptocurrency community continues to be shaken by the collapse of UST and Luna, adding an uncertain period.
Luna Recovery: Will Luna Recover After Announcing the Do Kwon Terra Recovery Plan?
Kwon shared the Terra Ecosystem Revitalization Plan on the Terra Research Forums, which seems to be inspired by other community offerings.
A new Luna with a supply of 1 billion was to be distributed here. 40% of this Luna will be allocated to existing Luna owners before depeg. Another 40% will go to existing TOPT holders. 10% would go to existing Luna owners, and the final 10% would go to a community pool for development.
This Luna rescue plan puts Terra Layer-1 first as Kwon and the community work to save the wider ecosystem. “Terra needs a community to continue to grow and make the block space valuable again,” Kwon said. “The only way to do this is to ensure that the most loyal community members continue to deliver value for token holders.”
Of course, this remains just a proposal and may never happen without a consensus among the Terra community. Some users questioned the distribution of the new Luna, commenting on Kwon’s plan. Others questioned how this would affect central exchanges of owners.