In the midst of the general fall in the market for cryptocurrencies, there is one that has caused panic in investors due to its resounding collapse: Earth (Moon).
The protocol Terra, used for stablecoins (stablecoins) backed by fiat money (dollars, won, etc.), has seen the value of his moon Cryptocurrency, coming to be worth only 2 dollars from the 50 dollars in which it was.
The fear with this project is not unjustified. Luna it peaked just a few months ago, reaching $116 in April. And in a matter of weeks, it’s not worth much anymore, dropping from the top 10 by market cap to around 30th, according to CoinMarketCap.
What happened to Luna?
the problem with Terra is the launch of a new cryptocurrency called Terra USD (UST), which sought to have a value established in one dollar. Unlike other stablecoins such as the BUSD or USDTInstead of supporting the cryptocurrencies in real dollars, Terra he backed them with investments in bitcoin.
This detail is not minor, since the value of bitcoin has fallen sharply in the market in recent months, with a peak the decrease of almost 10% at the beginning of the week.
Likewise, the UST were generated algorithmically in relation to investments in Luna. This works like this: when its price falls, the algorithm exchanges its tokens for Luna and burn coins UST of circulation, which can be compared to destroying money. In case the price goes up, the process is reversed.
Therefore, the value of the “stable coin” was linked to two other cryptocurrencies volatile under the tutelage of the Foundation Terra.
So, in the midst of the general fall, Terra has suffered two setbacks. On the one hand, with the fall in the value of Luna, new coins have been created UST, which causes a disparity and generates inflation, causing each token to be worth much less than a dollar: UST it is currently worth 50 cents, dropping as low as 30 cents at some times in the morning.
”The Terra USD stablecoin (UST) has been under immense pressure recently and there are no signs of this letting up. We are seeing an unprecedented situation in what used to be the third largest stablecoin with over $18 billion in market capitalization, bringing it down to just over $7 billion,” says Derek Lim, head of crypto insights at Bybit, one of the fastest growing cryptocurrency exchanges in the world.
This process has had a domino effect, causing the backup in Luna continue to decline and investors withdraw their money, deepening the crisis amid the general decline in the market. With less value in moon cryptocurrencies, new ones are created UST and this value will continue to decrease. Given this, the Terra Foundation is selling its bitcoins at prices lower than those bought to try to calm the situation in both formulas.
“UST it is an algorithmic stablecoin, which means that its value is tied to an arbitration system. Over the past few days, the system was unable to keep up with the huge flash selling pressure, causing the value of UST to become unpegged, resulting in a cascade of liquidations and panic selling,” Lim said.
It’s the worst time for Luna and to UST, But this hasn’t been all chaos for new investors. For example, many people entered the lower peaks of UST, when it was worth 30 cents and they managed to cause it to go up to 50 cents and make quick profits. However, in the case of Luna, the trend does not seem to reverse.
“Other stablecoins like USD Coin and Tether (USDT) are collateralized. This means they are backed by a traditional-style treasury, held by a centralized company, so there is little risk of contamination. For now, it seems that this situation is contained in SET, LUNA (native token from Terra) and the projects immediately associated with both”, details the specialist.
Terra was founded in January 2018 by Daniel Shin and Do Kwon. The two envisioned the project as a way to drive rapid adoption of blockchain technology and cryptocurrency through a focus on price stability and ease of use. Kwon took over as CEO of Terraform Labs, the company behind Terra.
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