If you’ve been in the cryptocurrency space you would’ve heard about how one of the largest coins just last week fell from a high of $120 to a low of $0.000000999967, a 100% loss in the span of 7 days.
The De-Pegging
- Terra ($LUNA) acts as a reserve currency to algorithmically stabilize various stablecoins including TerraUSD ($UST). For every 1 UST that was minted, 1 USD worth of LUNA was burned.
- Holders of UST were able to stake their coins on Anchor Protocol, a site that provided users with a 20% variable rate. It is within Anchor that 75% of all UST was held up until the crash, this accounted for over US$14 billion according to CoinDesk.
- UST was de-pegged from its ‘stable’ price of $1, this was caused by a major sell-off which caused UST to drop below $0.69. This sudden surge in UST caused supply to exceed demand which broke the algorithm that keeps the coin at $1.
- Fear and uncertainty washed over markets, with rumors that big players were behind the sell-offs which caused the crash. As people started selling their coins and liquidating their UST from Anchor, the supply of UST surged even further causing the price to drop even more as the balancing mechanism started to get overwhelmed, causing its failure.
- As of the time of writing, UST is trading at $0.1177 and $LUNA is trading at $0.0001796 according to data from CoinMarketCap.
The Recovery Plan
- 11th May, Do Kwon, Twitter: “Close to announcing a recovery plan for $UST. Hang tight.”
- 11th May, Do Kwon, Twitter: “I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this.” This was the first apology from Terra founder Do Kwon.
- 12th May, Terra, Twitter: “The primary obstacle is expelling the bad debt from UST circulation at a clip fast enough for the system to restore the health of on-chain spreads” adding “To expedite this goal, several measures are being taken. First, the current Prop 1164 will expand the base pool size and accelerate the burn rate of UST – helping deflate on-chain spreads.”
- 12th May, Terra, Twitter: “TFL is also initiating three more emergency actions: 1. Proposal to burn the remaining UST in the community pool. 2. TFL will burn the remaining 371 million UST cross-chain on Ethereum. 3. TFL just staked 240 million $LUNA to defend from network governance attacks.”
- 14th May, Do Kwon, Twitter: “There are multiple proposals on Agora on the best steps to move forward for the community” This is in relation to possible recovery plans submitted on Agora, Terras Research Forum.
- 17th May, Do Kwon, Twitter: “The Terra chain as it currently exists should be forked into a new chain without algorithmic stablecoins called “Terra” (token Luna – $LUNA), and the old chain be called “Terra Classic” (token Luna Classic – $LUNC). Both chains will coexist.” Do Kwon announces plans of a fork, although this has been met with mixed opinions so far.
The Repercussions
- A report from The Block discovered that Terra’s in-house legal team had resigned following the collapse of UST and LUNA.
- Do Kwon has been summoned by the South Korean Congress to testify on the collapse of UST and LUNA, according to local reports from Newspim.
