Over the last two days, the Luna de Terra crypto plummeted to a new low, crashing hard in terms of prices, with its stablecoin, UST losing its peg.
At press time, Luna’s price has dropped by 90% and currently stands at $3.18. UST is down 48% at $0.48.
Unlike traditional stablecoins, UST was presented as an algorithmic stablecoin, but what forced its price to plummet?
What happened to Terra Luna?
Luna’s crypto lock comes from its link to TerraUSD (UST), the algorithmic stablecoin of the Terra ecosystem.
UST is an algorithmic stablecoin and is operated through computer codes that help maintain its price balance. The process involves burning or minting LUNA/UST to maintain the price of these tokens.
When a UST is minted, $1 of Luna is burned, while this also happens the other way around for Luna minting and UST burning. As UST threatens to drop below par, holders will sell their UST (or burn it) for $1 of Luna, making a small profit. This is until UST rises above $1, when the opposite stimulus occurs.
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After a large amount of UST was downloaded, the stablecoin started to unpeg. More UST was sold in a mass panic, minting more Luna and increasing its circulating supply. This had the effect of driving down the price of Luna.
According to Wu Blockchain, some 46 million Luna were issued on May 10, with 1.2 billion UST burned. This number appears to have increased further on May 11 as prices fall further.
The Luna Foundation Guard had been buying Bitcoin to save UST from disassociation. However, the practice did not work out amid the gradual collapse of cryptocurrencies.
In addition to these issues, cryptocurrency exchange Binance has also halted LUNA and UST withdrawals due to network congestion. Since then, Binance has faced criticism for this move. some in Twitter comparing it to when Robinhood restricted GME trading in early 2021.
Luna’s Do Kwon has now posted a recovery plan for Luna, that seems to have had at least some effect on the general sentiment. After falling to its low of $0.81, Luna is now above $3.
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