The Fall of Luna
Luna is a cryptocurrency that has boomed in popularity over the past few months. However, on Thursday, May 12th, 2022, the coin crashed to nearly 0 dollars. This collapse has left investors with billions of dollars in losses and a plethora of questions. Here is what you need to know about the fall of Luna.
The Terra Luna token fell from a high of $118 last month to $0.09 on Thursday. On Saturday, May 14th, it is at the price of $0.000389. Luna is the sister cryptocurrency to the stable coin TerraUSD. Therefore, the key to understanding why this happened is understanding stablecoins and what they are.
TerraUSD is a stablecoin, which means that it is a cryptocurrency whose value is pegged or tied to that of another currency, commodity, or financial instrument. They aim to be as close as possible to the fiat currency that it is pegged to. These coins have become a large part of the cryptocurrency ecosystem, as they have reduced much of the volatility that is generally associated with cryptocurrency.
This is where we begin to see one of the potential reasons for this crash. TerraUSD, unlike most of the popular stablecoins, was not backed by any real-world assets such as bonds. Instead, it was backed by an algorithm that attempted to peg it to the USD as close as possible. The way this algorithm worked was that it formed a link between TerraUSD and a sister coin, Luna. If the price of Terra began to fall, the algorithm would get rid of some Luna to increase the value of TerraUSD. In a sense, it was essentially manipulating the inflation and the deflation of the currency for its price to remain stable. However, this system was not foolproof, as evident from the crash.
Many researchers agree that this crash has to do with Anchor Protocol - a crypto bank created by the developers of TerraUSD. By early May, investors had deposited more than $14 billion of TerraUSD in Anchor. Transactions this big naturally had an effect on the market, causing TerraUSD to be knocked off its peg. This led to investors selling their coins invested in Anchor. Naturally, that action led to investors pulling out of Anchor. This cascade of withdrawals led to TerraUSD falling as low as 23 cents. Since Luna was linked to TerraUSD, it was affected as well, leading to its value falling to almost zero.
What Does This Mean for the Future:
This collapse has had effects that can already be seen in the market. Bitcoin fell 29% in the past week, and traders have no doubt it is because of the crash of TerraUSD. An event like this has had a massive impact on investors as well. It has led to them questioning the viability of cryptocurrency as an investment for the future, and some of them are now considering if a centralized framework is a must in this market. Lawmakers are now urging for the regulation of stablecoins, so events like this in the future are prevented.