What Happened to Terra Luna 🤔 Crypto Crash Explained
Hey Guys! Welcome and Today at Chainpals, we will investigate this somewhat unbelievable crypto crash of Terra Luna!
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Imagine watching your life savings plummet to almost zero in the matter of 24hrs, an investment which had a market cap of over $40 billion and dropped to just $500 million in a day. And as we’ve just recently seen, once the UST lost it’s dollar peg, investors rushed to dump there connected Luna, which of course had a knock-on effect and saw Luna nosedive from around $85 a week ago to around $0.04. So, let’s find out What Happened to Terra Luna?
Terra is a stablecoin-creating blockchain network created using the Cosmos SDK. Each Terra stablecoin is convertible into the network's native token, LUNA, rather than using cash or over-collateralized crypto as reserves.
The Terra network's native tokens, Luna and TerraUSD (UST), are both blockchain-based projects developed by Terra Labs in South Korea. Terra's goal is to become a peer-to-peer electronic cash system. It intends to accomplish so by employing "stablecoins," which are cryptocurrencies that are tethered to a real-world currency. The UST is tied to the US dollar, which implies that one UST is roughly equal to one dollar. This is where Luna comes in.
TerraUSD and its sibling currency Luna have plunged roughly 80% in the previous few days, shaking the entire crypto market, including tokens like Bitcoin and Ethereum. Terra Luna is nearly worthless now. This has caused investors to become fearful, and even the most aggressively bullish crypto investors are suddenly panicking.
The Luna crypto meltdown is caused by its connection to TerraUSD (UST), the Terra ecosystem's algorithmic stablecoin. UST is an algorithmic stablecoin that is controlled by computer instructions that keep its price stable. To keep the price of these tokens stable, the method entails burning or minting LUNA/UST.
When a UST is minted, $1 of Luna is burned, and the same is true when Luna is minted and USTs are destroyed. As UST approaches its peg, holders will sell (or burn) their UST for $1 of Luna, generating a small profit. This is true until UST increases beyond $1, at which point the inverse is true.
The stablecoin began to depeg after a substantial amount of UST was dumped. In a panic, more UST was sold, minting more Luna and boosting the circulating supply. This had the unintended consequence of collapsing the price of Luna.
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