What's Hot

    First Citizens to Buy Silicon Valley Bank

    March 27, 2023

    Nasdaq Looking to Launch Crypto Custody Services in Q2 2023

    March 27, 2023

    Africa Moving to Crypto as Alternative to US Dollar

    March 27, 2023
    Facebook Twitter Instagram
    Facebook Twitter Instagram
    The Bull's GazetteThe Bull's Gazette
    Members Area
    • News
      1. Markets
      2. Policy & Economy
      3. Business
      4. Tech
      Featured

      First Citizens to Buy Silicon Valley Bank

      News March 27, 2023
      Recent

      First Citizens to Buy Silicon Valley Bank

      March 27, 2023

      Nasdaq Looking to Launch Crypto Custody Services in Q2 2023

      March 27, 2023

      Africa Moving to Crypto as Alternative to US Dollar

      March 27, 2023
    • Features
      • Opinion
    • Research
      • Publications
      • Market Analysis
      • Contribute
    • Finance & Crypto Guides
    • Consultation
    • Membership
    • Store
    The Bull's GazetteThe Bull's Gazette
    Home»Premium»Case Study»Luna Eclipse: The great crash of 2022
    Case Study

    Luna Eclipse: The great crash of 2022

    As one of the most significant wealth transfers in history went on overnight, there are vital lessons to learn from this crash.
    Abir AhmedBy Abir AhmedJune 1, 2022Updated:August 1, 2022No Comments4 Mins Read
    Share
    Facebook Twitter LinkedIn Pinterest Email

    Terra’s vision was to create an open-source financial system that would enable anyone in the world to access crypto assets, accelerating global adoption. Terra’s stablecoin, TerraUSD or UST, is (was) pegged to the US dollar.

    Luna and TerraUSD are the two most known native tokens of the Terra network, developed by Do Kwon in South Korea in Jan 2018. The terra ecosystem currently contains over 100 natively built projects spanning from DeFi to NFTs. With the growth of crypto and smaller projects such as Terra getting the spotlight, Luna saw its price gain momentum rapidly. Boasting an all-time high of $116, a 23x gain in less than a year, Luna became a top coin in terms of market cap.

    Whilst most stablecoins like Tether, discussed in our stablecoin guide, are usually backed by assets, others rely on maintaining the peg algorithmically. TerraUSD is one of these algorithmic stablecoins and was the 4th most popular stablecoin. It maintains the 1:1 ratio with the dollar through an “arbitrage see-saw” mechanism. What do I mean by that? TerraUSD is always supposed to be worth exactly $1. To mint a Luna Token, you burn a TerraUSD. Burning $1 worth of Luna will always give you $1 worth of Terra USD and vice versa. It’s like a seesaw, where TerraUSD is on one end, and Luna is on the other.

    Where does the arbitrage come in?

    If the demand for TerraUSD falls and is now worth $0.98, as we can exchange 1 TerraUSD for $1 worth of Luna, the keen arbitrager will see that you can profit from this disparity and hence pocket a 2 cent profit. As more and more people burn TerraUSD, you can see that the supply of Terra USD decreases. Basic economics and the laws of supply and demand tell us that as supply decreases, price increases, causing TerraUSD’s price to rise back to the $1 peg. Let us now assume that due to the vast influx of burning, TerraUSD rises to $1.02. Luna holders now realize that if they burn their $1 worth of Luna, they can mint 1 TerraUSD worth 0.02cents more. This seesaw mechanism maintains the “stability,”…. Though we found out that stability didn’t last for too long.

    So, what caused this bloodbath?

    To put it simply, the seesaw broke. TerraUSD had the Anchor Protocol, enabling UST holders to gain an alarming monstrous 20% APR – The likes of which no commercial bank can ever offer. Before the recent crash, it was estimated that 75% of all the TerraUSD in circulation was deposited in Anchor. In March 2021, Terra and Anchor replaced the 20% rate with a variable rate. This saw large amounts of TerraUSD being withdrawn from Anchor. The virtual bank run prompted massive FUD, causing groups of investors to flee from LUNA and UST. Since many people used UST as their digital savings account – the emergency exit was to burn TerraUSD in exchange for Luna. The supply of Luna ballooned, causing the price to plummet. 

    As more and more people ran to burn their TerraUSD, UST crashed, and Luna with it. The stablecoin plummeted to as low as $0.13.  Luna tanked, reaching almost zero, less than a week from being $80. As of writing, Luna stands at $0.0002941 and UST at $0.1993. This is undoubtedly one of the most significant crashes we have experienced within the crypto market, sending ripples across to Bitcoin Ethereum and all underlying assets. Overall, the entire crypto market fell to $1.2 trillion from the $2.9 trillion high. Famous influencers such as KSI reported a loss of $2.8million with Reddit stories of suicides coming to light. 

    The crash of Luna reflects the inherent instability of cryptocurrencies and the problems that come with them. We still have a long way to go for global adoption, but if there is anything that this event has taught us, it’s the fact that even stable coins are subject to instability.

    Crash Cryptocurrency Featured Insights Luna Markets Stablecoin Terra USD UST
    Share. Facebook Twitter Pinterest LinkedIn Tumblr Telegram Email
    Previous ArticleProof of Work vs. Proof of Stake
    Next Article How To Know What Crypto To Invest In
    Abir Ahmed
    • Website
    • Instagram
    • LinkedIn

    Co-Founder, Designer, Researcher, and Marketing Director. Blockchain enthusiast that's curious about disruptive technology and its impact on global emerging markets.

    Related Posts

    Nasdaq Looking to Launch Crypto Custody Services in Q2 2023

    March 27, 2023

    Terraform Labs Chief Do Kwon Reportedly Arrested by Police in Montenegro

    March 23, 2023

    Central Bank of Brazil Launches CBDC Pilot…..Target Full Launch by 2024

    March 8, 2023
    Add A Comment

    Leave A Reply Cancel Reply

    Top Posts

    New Crypto Mining Bill in Russia Mandates Earnings Reports

    March 10, 2023

    India Pushes Anti-money Laundering Regulation for Crypto Transactions

    March 8, 2023

    Zambia Explore Crypto Regulatory Framework 

    February 20, 2023

    Our best content, straight to your inbox.

    Disclaimer

    Capital at risk. Content on this website does not constitute financial advice. Please do your due diligence before making any investment.

    Company
    Company

    At the forefront of news and analysis for emerging markets, business, crypto and tech - TBG is redefining financial information through resources for next-generation economics.

    Facebook Twitter Instagram LinkedIn TikTok Discord
    Links
    • About
    • Contribute
    • Advertise
    • Careers
    • Membership
    • Investor Relations
    • Frequently Asked Questions

    TBG Newsletter

    © 2023 The Bull's Gazette.
    • Terms and Privacy
    • Contact Us

    Type above and press Enter to search. Press Esc to cancel.