Terra Luna Crash, UST depeg and algo stable coins
UST and $LUNA crash devastated investors and the crypto market in May 2022.
Just a week ago Do Kwon, founder of Terra, was making his usual braggadocio type of tweets, denouncing anyone doubting Luna bright future.
As of today, 13th May 2022, Luna crashed entirely, going from $119 to sub $0.02 in less than 6 weeks. It’s the first time the coin this big (and L1 blockchain with its own ecosystem) crashed this fast. But it isn’t the first algo stable coin nor the last to crash.
I’ve already written about Iron Titan ecosystem last year here which was huge last year. Terra Luna is however much bigger and was much more painful to watch as thousands of people have their net worth wiped out within such a short period of time. So you might ask…
How Terra Luna works and what is an algo stablecoin?
Before we deep dive into the causes of the crash, let me remind you how it worked. In the Terra ecosystem we had two major actors:
- UST which was supposed to be a stable coin pegged to dollar (so it should hold $1 value all the time)
- Luna which was introduced for regulating & governing purposes and served as a utility token for the Terra blockchain.
So far, so good, there are many ecosystems like that.
UST was an algorithmic stablecoin, which means Terra foundation didn’t hold a collateral for the peg (they didn’t have a real $1 for each 1 UST). Instead, they relied on the printing mechanism of Luna.
For example if demand for UST is too high and its price goes above $1, the Terra protocol lets users trade $1 worth of LUNA for 1 UST at the Terra station portal. This trade burns $1 worth of LUNA and mints 1 UST, which users can sell for $1 + difference and pocket a profit.
On the other hand, to ensure that people are attracted to the Terra ecosystem, the Anchor protocol allowed people to stake their UST for 20% yield, which was really competitive considering that most stablecoin yields are in the range of 4%-12%.