The Terra (LUNA) cryptocurrency fell from $120 to $0.68, a drop of 99.5 percent. Of that drop, 98 percent happened in just one day, which is called a “black swan” event.
The SPX fell below 4,000 for the first time since May 2021, and Bitcoin fell below $28,000 for the first time since January 2021. The strength or weakness of Bitcoin is often related to the strength or weakness of altcoins, and the correlation between the crypto markets and the S&P 500 as a whole hit a 17-month high in March 2022.
But the reasons for the LUNA crash go deeper, and they show how volatile crypto prices can be.
What is Terra (LUNA)?
According to the keyword tool Ahrefs, at least 500 individuals per month search for “what is Terra Luna” in search engines like Google.
Terra is the crypto asset’s full name, while LUNA is its ticker symbol.
However, to avoid confusion with stablecoin TerraUSD, ticker UST, most people still refer to the LUNA crash rather than the Terra crash. UST, while being a stablecoin, also crashed.
| What is Terra Blockchain | What is Terra Crypto | What is TerraUSD |
| Platform to create stable coins pegged to fiat moneyPowers global payments systems with fast and affordable settlements, like Alipay on the BlockchainMainnet went live April 2019. Custom blockchain on Cosmos SDKOffers stable coins pegged to USD, South Korean Won, Mongolian Tugrik, the IMF’s SDR reserve asset, and planned more optionsCompany alleged to be backed by $3.5 billion in Bitcoin reserves in case something goes wrong – one of the top 10 BTC holders | Ticker Symbol LUNAWhen stablecoins de-peg slightly, LUNA is sold / burnt to stabilize themICO Price $0.80Historical Low of $0.40 on Binance in August 2020Hit All Time High of $119.55 in April 2022, a 300x gainBecame 6th largest crypto with a market cap of over $40 billion – now 41st with $1.5 billionLUNA validators also receive rewards | Ticker symbol USTA stablecoin pegged to the US dollar, like Tether (USDT)Investors earnt 20% APY (annual yield) staking UST on Anchor Protocol, other crypto platformsCrashed from $1 to $0.30Was top 10 crypto asset – still #11 with $9.6 billion market capStable coins USDT, USDC and BUSD have higher cap |
Terra (LUNA) and TerraUSD (UST) were launched by Terraform Labs, a South Korean company founded in 2018. Do Kwon, the CEO of Terra Labs, is at the centre of the plot.
The concept of creating a ‘algorithmic stablecoin,’ in which LUNA is burned to’mint’ UST to keep it stable when it loses its 1:1 peg to the dollar, and vice versa, is distinct from how existing stable coins such as Tether (USDT) and USD Coin (USDC) work. If UST reaches 0.99, a little amount of LUNA is burned, and if it reaches 1.01, a small amount of UST is burned. Read more; Advantages and Disadvantages of Investing in Crypto
It was effective until it wasn’t.
In breaking news today on Coindesk and Yahoo Finance, it was revealed that Do Kwon was behind a failed stablecoin crypto project named Basis Cash in the past.
No one knows why UST lost its peg, and Do Kwon has not provided an explanation to investors or the general public. According to one theory, this was a coordinated attempt to exploit Terra and induce a Bitcoin meltdown, allowing ‘whales’ to buy in at a low price.
Why Did Luna Crash?
Some speculate that it was a personal attack since Do Kwon, 30, has a reputation on Twitter for arrogance. Charles Hoskinson, the founder of Cardano, proposed one possibility, although he later removed the tweet.
He claimed that a huge institution had borrowed 100,000 Bitcoin from the Gemini exchange on Twitter. They subsequently exchanged a big amount of BTC for UST at a discount with Do Kwon over the counter (OTC). He agreed, and the UST liquidity was reduced.
That institution allegedly dumped massive sums of BTC and UST on the market, resulting in a liquidation cascade of leveraged longs, slippage, and panic selling by investors, with many liquidating their LUNA holdings and unstaking their UST to sell it.
According to the tweet, Terra was a ponzi scheme with insufficient BTC reserves to prevent the crash. None of these accusations have been confirmed, and Gemini has denied making such a loan. Market manipulation, on the other hand, is frequent in all financial markets. Read also; Right Ways to Get Started in Crypto for Beginners
