Industry News Luna Debacle showcases a Critical Point in the Crypto Markets

Luna Debacle showcases a Critical Point in the Crypto Markets

May 17, 2022

May has been a devastating month for the cryptosphere in more than one way. The same period saw the bitcoin price drop from around 50,000 USD to below 30,000 USD in a matter of days. Other big cryptocurrencies did not have any different experiences so far and the negative outlook seems bound to continue. However, some crypto projects have gone completely under in a very unprecedented manner. Last Friday, the cryptocurrency token luna went down to 0 USD based on the date from the CoinGecko platform. That was an incredible implosion of a cryptocurrency that was not a scam or some get-rich-quick scheme. Instead, it was a well-known cryptocurrency that had its token price at around 100 USD at one point. 

However, now it is basically non-existent and it truly developed to nothing. The demise of Luna came with the demise of the stablecoin Terra, which then triggered a huge meltdown in the wider crypto markets. The tribulation from that process took out billions of USD worth of tokens in less than a day. All of this likely seemed impossible only a few weeks prior to this but it presented a very real and very damaging scenario. It played out in reality in a way few could have predicted. Now, it is essential to understand the mechanisms that led to this decline and the wider pullout of investors from the crypto marketplaces of all kinds. If no lessons are generated by the fall of these tokens and stablecoins, the same scenario can play out again in the near future. 

TerraUSD Case

The token known as TerraUSD or simply UST is a cryptocurrency known as stablecoin. It should be pegged or connected to the price of USD at all times. That makes it a transient token in the digital space that is nothing more than a streamlined and more versatile version of the USD. But, the same token ran into a problem when it lost its USD peg last Friday. 

By the end of the same day, it was trading at around 0.12 USD and was nowhere near the point of tethering to this traditional fiat currency. That added another domino to an already huge construction that was unstable even before the start of all of these issues. With TerraUSD losing its peg, the cascade of falling dominos either began in earnest or began to dramatically accelerate, according to different outlooks on this process. 

Bitcoin Defensive Wall

Bitcoin was in hot waters during this turbulent period as well. However, as the biggest digital currency in the world, it has stronger support among its backers, counting both present and future ones. So, while it fell down to its lowest price in months, it also tagged a rebound on Friday, when it jumped about 30,000 USD. At the same time, the implosion of TerraUSD began to cause ripple effects of spreading panic in the crypto market. The same pulled even the biggest stablecoin down, which is tether. But, it too managed to regain its USD peg after a few hours that saw it trade below one USD. 

Ethereum, the world’s second-biggest digital currency, also managed to defend one of its crucial support lines, which stands at 2,000 USD. It saw a slide below that number, but it too did not last for long. Any of these points in any of these digital currencies could have been the diving board for an even bigger decline and a prolonged selloff period. Yet, for now, the risk of that has passed. So, it appears that the bigger digital currencies, no matter what type of technology is backing them, managed to overcome this selling pressure.

UST and Luna

Both UST and Luna are cryptocurrencies that are linked. UST is what is called an algorithmic stablecoin, which operates an embedded code. That code should make sure that the one USD peg is active at all times, connecting the token with the actual United States dollar. On the other hand, many stablecoins, including USDC and tether, are linked to real-world assets including bonds. UST does not have any reserves in the real world. Instead, it uses a system of mining tokens and then burning them to keep hold of this real-world connection and thus its stability, similar to complex esports setups and other digital-only ventures. 

It is also destroying its connected crypto tokens including luna and with it, allowing it to keep hold of these stable mooring points. In theory, that system is completely functional and can deliver on its token-to-USD peg promise. But, during extreme volatility in the markets, the same system is put under a lot of pressure. In this case, UST did not manage to successfully maintain its peg and that created a catastrophic cascade of events. 

End of Luna

The loss of the USD peg was a disaster, but it was amplified by the fact that the Terra blockchain, which underpins both luna and UST stopped working occasionally at that critical moment. In 24 hours, it ended operations and suspended all transactions twice. Binance, the biggest digital currency exchange, was forced to suspend its activity with the same blockchain. It quickly delisted both luna and UST on Friday. They resumed their trading later that day, but the damage was done. It is impossible to say whether or not luna is truly dead in the water or if there is a means to resume its regular activities. 

In any case, the problems that it faced are the biggest ones in the crypto market for many years. Rebuilding any meaningful support and confidence in either the luna crypto token or the stablecoin on the Terra blockchain will be insanely difficult and in the best case, a process that lasts for years. More importantly, it shows that the cryptosphere has another huge potential problem on its hands with other stablecoins that function in a similar manner. For now, the solution seems to be formulating itself with investors avoiding these stablecoins and seeking other points for their funds. However, the price of the lesson on luna and UST seems to be another bear market. 

Source: NBC