The cryptocurrency market is in turmoil and exacerbated by the collapse of Luna and UST Stablecoin. Both are linked to the Terra blockchain.
With a crypto value of over $17 billion, the crash in general raises questions about Stablecoins. The incident caught the attention of politicians and regulators.
The company behind UST will build a new blockchain, although it does not include Stablecoins.
At the moment, the cryptocurrency market is ruthless: you will see red charts in all directions. Bitcoin has been in the red for eight straight weeks, the cryptocurrency’s record high, and ether is at its lowest since 2020. This hurts crypto investors, but the dive isn’t entirely unprecedented. Cryptocurrencies are notorious for their volatility, and dystopian economic conditions have led not only to the cryptocurrency but also the stock market to plummet.
However, the collapse of the cryptocurrency Luna and its associated stablecoin terraUSD (also known as UST) was unprecedented. You’ve probably never heard of floor lockers or know what stablecoin is, but that’s a big deal. Billions of dollars in crypto assets have evaporated, sending shock waves throughout the market.
There are two intertwined stories here. The story of UST Stablecoin and the story of Luna are part of the Terra blockchain. The floor treasury currency, designed to hold one dollar at all times, was devalued on May 9, and has since fallen to just 7 cents. Next is Luna, the hub of the Terra ecosystem . Its value collapsed in one of the most stunning cryptocurrency crashes ever recorded.
Luna price chart is showing historical breakdown.
The price of the coin has fallen from $116 in April to a fraction of a penny at the time of writing. Such explosions have been seen in small Memecoin in the past, but they weren’t as big as Luna, whose market capitalization topped $40 billion in the past month.
“This is a historic milestone for the cryptocurrency market,” said Mike Burrow, co-founder of crypto investment firm Fortis Digital. “This is the defining moment of space because of its impact in terms of the size of the space and the number of people who lose a lot of value. “
Terrasaga has more than billions missing. This raises questions about similar tokens, the peg, and the island-wide political regulators looking for Stablecoins. Here’s what you need to know.
What are stablecoins?
To understand the cryptocurrency disaster, you must first know what a stablecoin is. In essence, it is a cryptocurrency that is installed on a more stable coin. The largest coins are Tether and USDC, both of which, like most stablecoins, are pegged to the US dollar. For example, if you have 1,000 USDC Tokens, you can always exchange them for $1,000.
Stable coins are an integral part of “DeFi, ” or decentralized finance and is designed as a way for investors to hedge against the volatility of the cryptocurrency market. Assuming that the price of Ether is $2,000, the trader can exchange Ether for $2,000 tokens. Even if tomorrow’s Ether drops from 50% to $1,000, the $2,000 token equals $2,000 and can be exchanged for two Ether tokens. When investors smell a downtrend, they will invest in stablecoins like Tether, USDC and UST during this week.
Stablecoin also provides a means to lend and borrow cryptocurrencies, which will become the core technology for DeFi.
The UST coins created by Terraform Labs are very different from the Tether and USDC coins. These are known as decentralized algorithms or stablecoins rather than being backed by actual US dollars. (US Tether reserves have been researched in the past and there is speculation about how many dollars it actually holds, but in principle they are backed by US dollars). For Terraform Labs, how many ideas? In addition to that clever mechanism, billions of bitcoin reserves allow the currencies to be pegged to the US dollar without being backed by the dollar.
“Distributed stablecoins are the Holy Grail of DeFi ” Cyrus Younessi, former risk manager for MakerDAO, the group behind DAI Stablecoin, said Ziada. It is difficult for bureaucrats, politicians, and central bankers to manage Bitcoin and Ether POS, but the downside is price volatility. “If you can get these assets and get stability out of them and market them, that’s huge,” said Younesi.
“But it’s not worth it.”
Terra, Luna, UST: What is it?
Terra is a blockchain, just like Ethereum and Bitcoin. The Ethereum blockchain natively generates the tokens of Ether, while the Earth natively generates Luna. The day before MoRA, Luna was trading at $85.
To make a ground tank, you need to burn a luna. For example, you can exchange one Luna token for 85 UST in early May (because Luna is $85), but in the process, Luna will be destroyed ( “burned “). This contractionary protocol is to ensure Luna’s long-term growth.The more people buy floor cabinets, the more Luna will be burned and the rest of Luna’s supply will be more valuable.
In order to invite traders to burn Luna to make the floor cabinets, the creators offered a crazy 19.5% return on a bet via the so-called Anchor Protocol. Instead of keeping your savings in a bank with an interest rate of 0.06%, the advice is to direct your money to floor lockers, where you can earn interest around 20%. Before the license was removed, more than 70% of the circular supply from ground tanks, about $14 billion, was stored in this scheme.
The key to the floor cabinets for holding pegs is: 1UST can always be exchanged for $1 Luna. So if the land tank drops to 99 cents, traders can profit by buying the land tanks in bulk and exchanging them for Luna, earning a penny per token. This effect works in two ways. People buying the floor cabinets raised the price, and the floor cabinets were burned during the Luna exchange, reducing supply.
After that, there are backups. DoKwon, founder and CEO of Terraform Labs, created the Luna Foundation Guard, a consortium with a mission to protect risks. LFG holds about $2.3 billion in Bitcoin reserves and plans to expand it to $10 billion worth of Bitcoin and other crypto assets. If the underground treasuries are less than $1, the bitcoin reserves will be sold and the terrestrial treasuries will be purchased from the profits. When the floor treasuries exceed $1, the builder sells until the ground treasuries revert back to $1 and the profits are used to buy bitcoins to replenish the reserves.
Everything is logical. But at the time of writing, floor cabinets are worth 7 cents. How?
UST Ministry of Religion
It all started on Saturday 7 May. No more than 2 billion US dollars were stored (taken from the docking protocol) and hundreds of millions of dollars were immediately sold. Whether this was a reaction to a period of instability (increasing interest rates particularly affected cryptocurrency prices) or a more malicious attack on the Terra system is still a matter of debate.
Those big sales pushed the price up to 91 cents. Traders tried to take advantage of arbitrage and traded 90 cents of floor lockers for $1 from Luna, after which speed issues arose. Underground tanks worth $100 million could be burned just for Luna.
Investors who are already in a bad mood on the black market are currently flocking to sell floor treasuries after Stablecoin can no longer hold the peg. It rebounded between 30 and 50 cents a week after the first deposit, but has now fallen to a steady low of just under 20 cents. The market capitalization, which was about $18 billion in early May, is now $770 million.
Today’s LUNA was $82.55 a week ago Current price: $0.01
Stablecoin powered by Costco and Pepsi sausage pic.twitter.com/dDLgnKMAZa
Worst for a luna swatch. The value of the Luna code has almost completely disappeared. After the Luna was priced below $120 in April, it’s currently under 50 cents.
About the possibility of this being a malicious attack. Some speculate that the attackers are trying to beat the underground reservoirs to cash short bitcoins, i.e. betting on lower prices. If a potential attacker builds a large underground tank position and doesn’t bet $2 billion at a time, he can undo his land tank deals. This means that the terra team to sell some of their bitcoin reserves in order to reset Stablecoin. When the investor confirmed that the floor tanks lost the stake, he immediately dropped the bet on the floor tanks and sold them. This will require selling more bitcoin reserves, adding to the selling pressure.
Again, this is still a guess. Younesi said it was not clear if MoRA was the result of a coordinated attack, but that cryptographic developers were responsible for creating more secure systems.
“Our job as a DeFi maker is to build [exploit] tolerant systems. “This is really the original threat model that everyone in crypto has created: How would this hold up if a $100 billion man stepped in and tried to get rid of him? ? ” “”
Four years ago, while working as a DeFi analyst at Scalar Capital, Eunice called the Terra model “broken” “.
“Tera can grow up to ten times larger before such an accident,” he told CNET. “It is better that the unsustainable protocol bubble be punctured sooner or later.”
Why is this important?
This is important for three reasons.
First, more than $17 billion in crypto value has been destroyed by Luna and UST alone. There have been reports of cases of self-harm by people who bet a large part of their savings on floor cabinets – this cannot be confirmed, but it is clear that many lost a lot of money. in collapse. As the Boroughs of Fortis Digital website indicates the damage is not part of the Terra system . Many companies hit by Luna and UST will sell a large portion of their cryptocurrency portfolio and push the entire market lower to recoup some of the damage.
Second, it raises questions about other stablecoins. Again, terrestrial treasuries are unusual in that they are an arithmetic stablecoin, unlike Tether and USDC. However, the stability of this currency is always in question. For example, last year, the New York attorney general accused tether, the largest stablecoin, of lying about how much was actually held in dollar reserves. An estimated $10 billion has been pulled off the rope since May 11, with some speculating that this could be the second stablecoin to be carried over.
The autonomous regions are concerned that if the terrestrial reservoirs are attacked, similar games can be played against other universities.
“The question on our mind is what happens to the spread of terrestrial treasuries to other stable currencies. “If a great whale finds a playbook here that serves to attack the terrestrial reservoirs, I fear it will be reused in other areas of the market. do it.” “
Finally, and perhaps most importantly, the collapse of the underground reservoirs attracted the attention of powerful politicians and regulators. Treasury Secretary Janet Yellen stated on May 10 that the UST peg shows that this [stablecoin] is a fast-growing and volatile product, and said she was just there. “
The desire to regulate Stablecoins appears to have united the two American political parties. Because the owner will happen again.
What after Terra, Luna, and UST?
It’s been a tough week for Terra developers since the UST chapter. After several people, including Binance CEO Changpeng Zhao, inquired about how Bitcoin reserves would be used in the project, the UST Setup Share Protection Consortium , Luna Foundation Guard, tweeted that Bitcoin reserves fell from 80 thousand (about $2.2 billion) to only 313 ($9.2 million).
The remainder of the reserve is used to compensate the remaining users of “UST, with the younger owner first.
Meanwhile, Terraform Labs CEO Kwon has a controversial plan to bring Luna back to life.
1/ I have been contacting Terra community members (builders, community members, staff, friends and family) for the past few days and they have been devastated by the UST cancellation. I am deeply saddened by the pain my discoveries have brought you.
personal opinion. NFA. It does not work. The fork does not value the new fork. This is a hopeful idea from . -You cannot disable all transactions after the old snapshot, either in-chain or off-chain (exchange). Where is all the BTC that is supposed to be used as a backup? https://t.co/9pvLOTlCYf
Kwon proposed a plan to create Terra blockchain “fork “. Basically, this means creating a new blockchain model after the previous blockchain, with some significant changes. The new blockchain will be created with billions of Luna tokens that will be distributed to existing Luna owners and UST to fund the development of new Terra applications.
Perhaps while acknowledging the fundamental problem with linking Luna to UST, Kwon is proposing to remove ground tanks, which were previously the main blockchain selling point, from the Terra ecosystem. “Terra ” Terra has hundreds of people working on everything from DeFi to luxury job markets and modern infrastructure and community experiences. Developer included. “I suggest you save this on the terraUSD account.
The most famous fork in crypto history happened on Ethereum in 2016. After hackers stole DAO 3.6 million Ethereum ($50 million at the time, now over $7 billion), Ethereum developers bypassed the blockchain, except for recovering the 1 million new Ether that was stolen, And the same series in every way. This caused a rift in the community and some have kept their original chains to this day, which we call Ethereum Classic.
Kwon’s plan supports this branching. The new plan will rename the existing Terra blockchain to Terra Classic, but the new chain will only pass through Terra.
Many, including Zhao, were skeptical that the plan would work, but the holders of the floor cabinets and Luna agreed to the proposal. The new Luna era begins around May 27, when Terraform Labs wants to launch a new ecosystem.