In One Week LUNA Loses 90% Of It’s Value

The Terra blockchain uses fiat-pegged stablecoins to support price-stable global payment networks, and LUNA is the native currency of the Terra blockchain.

Terra, according to its white paper, combines the price stability and widespread use of fiat currencies with the censorship resistance of Bitcoin (BTC) to provide quick and economical transactions.

LUNA has dropped out of the top ten cryptocurrencies by market capitalization in the last seven days, and it is currently ranked #28 as of this writing. Its token price dropped from $87.96 a week ago to $8.81 as of this writing, representing an almost 90% drop in just seven days.

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The astonishing thing about LUNA is that it hit an all-time high of $119.18 just over a month ago and has since lost over 92 percent of its value, making it one of the fastest-declining cryptocurrencies with a market worth of $37.4 billion lost in less than five weeks.

What Is The Terra Blockchain?

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Terra wants to differentiate itself by using fiat-pegged stablecoins. The platform blends cryptocurrencies’ borderless features with fiat currencies’ day-to-day price stability. It maintains its one-to-one peg with a program-based system that changes stablecoin supply based on demand. It achieves so by motivating LUNA token holders to exchange their tokens for stablecoins at profitable exchange rates as needed, to enlarge or reduce the stablecoin supply to meet demand.

When Terra debuted its UST stablecoin in September 2020, this was the situation. TerraUSD (UST) is the Terra blockchain’s decentralized and programmable stablecoin. It’s a scalable, yield-bearing coin that’s tied to the US Dollar in terms of value.

TerraUSD was designed to provide value to the Terra community and to provide a scalable alternative for DeFi in the face of severe scaling issues that other stablecoin leaders, such as Dai, are experiencing. As a result, TerraUSD users should expect increased scalability, interest rate accuracy, and interchain usage.

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Where It All Went Wrong

The potential for passive income is a strong selling feature for holding UST. With the Anchor protocol’s steady interest rates, TerraUSD holders can earn passive income. The Anchor protocol is a Terra blockchain-based lending and borrowing technology. Despite the enormous sell-off, the protocol is still the most valuable in terms of total value locked (TVL), with $3.99 billion at the time of writing.

On UST savings, Anchor claims a 19.50 percent return. Rewards in PoS chains provide additional and consistent income, which is kept stable by commissions and inflation. This distinction, we reasoned, would allow us to formulate a reliable interest rate.

Lenders can then deposit their UST, which they can then redeem by burning their LUNA tokens, making the LUNA token scarce and allowing them to earn excellent returns on their investments while also benefiting from minimal volatility. Borrowers can convert their LUNA collateral into valuable assets without relinquishing control.

The market capitalization of UST has risen dramatically as a result of this pledge. In fact, UST has surpassed Binance’s BUSD as the third-largest stablecoin by market capitalization. After Terra founder Do Kwon committed to buying $10 billion in Bitcoin to back the programmable stablecoin, UST became extremely popular. The Luna Foundation Guard has so far purchased almost 42,500 BTC worth $3 billion, meeting its commitment to acquire $3 billion in the near future. The reality of economic policies and decisions, on the other hand, reached the market in May, intensifying the crypto market selloff.

The Federal Reserve of the United States raised interest rates when it announced its policy decision earlier this month. As part of its policy decision, the Fed raised its interest rate from 0.50 percent to 1%, the highest increase since 2000. Despite Fed Chairman Jerome Powell’s statement that the 75-basis-point super-hike feared by investors is “not something that the committee is actively considering,” inflationary pressures, high energy prices, and supply chain bottlenecks have caused riskier asset investors to derisk and flock to the safe-haven currency, the US dollar.

This triggered a significant selloff in the cryptocurrency market, with Bitcoin trading below $30,000 for the first time since May 2021, when the market fell by about 50%. The selloff, as well as the way the UST programmable stablecoin operates, resulted in a significant drop in LUNA, the de-pegging of the stablecoin, UST, and a more than 70% drop in Anchor Protocol’s native token, ANC.

How The UST Mechanism Works

Terra’s elastic monetary policy uses LUNA as a collateral asset to keep the currency peg at UST. The Terra protocol incentivizes users to burn LUNA and mint UST when the value of UST exceeds $1.00. When the price of UST falls below $1.00, the system compensates users who burn UST and mint LUNA.

This implies that LUNA’s value should fall as UST supply is reduced. Similarly, if UST’s supply grows, LUNA’s value rises, according to Will Comyns, a Messari researcher. For the first time in two months, the UST market contracted on May 8, falling by 28.1 million below zero. LUNA’s supply increased by over 436.75 million over zero at the same time.

The day’s contraction and growth were caused by market participants selling UST in large quantities worth almost $300 million. This trend persisted when Bitcoin fell below $30,000, prompting the LFG foundation to loan $1.5 billion to professional market makers to defend the UST peg. According to CoinDesk, the charity is scrambling to raise more funds to support the initiative.

What Is Happening Now?

• UST is still depegged as it is trading 30 cents as of the time of this writing. Down 70%.
• ANC, the native token of the Anchor Protocol, is down 72% in the last 24 hours.
• Terra blockchain, which had a TVL of over $31 billion at its peak, currently has $5.99 billion, down over 80%.
• Anchor Protocol’s TVL which peaked at $17.15 billion has lost over 76% as it currently stands at $3.99 billion.
• LUNA is down over 90% in the last seven days.
• Do Kwon, the project founder last tweeted, “Close to announcing a recovery plan for $UST. Hang tight.”