What Happened to Terra Luna ($LUNA)?

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Terra Luna ($Luna) has hit the headlines due to a huge crash in value, giving an example of what can be a volatile cryptocurrency market. But what happened and what does it mean for other coins? We’ve rounded up the key information for you below.

What Happened to $LUNA?

An overnight drop in Terra Luna’s token’s value left investors with only a scrap of their investments. 

  • On May 5th: Tokens of Terra Luna ($LUNA) were worth around $85 (£69.69)
  • On May 11th: Luna was already in trouble, having fallen to $17.38 (£14.25) in the early morning
  • On May 12th: the $LUNA coin lost 97.54 percent of its value, settling at $0.02863 (£0.023).

Luna fell owing to its ties to TerraUSD (UST), a dollar-pegged stablecoin. UST separated from the dollar earlier this week, prompting the decline. When Luna also plummeted, observers labeled it a “death spiral.”

Terra Luna - coinmarketcap chart
Credit: Coinmarketcap

What are Stablecoins like TerraUSD (UST)?

Stablecoins such as UST, Tether, and USDC act as crypto-bank accounts. These accounts are tied to fiat currencies like the US dollar on a 1:1 basis.

Unlike Bitcoin, Ethereum, and others, the 1:1 basis means their value is set to $1 USD.

However, TerraUSD (UST) is an algorithmic stablecoin. Its value is backed by an accompanying token called Luna, run on pre-programmed smart contracts. But these complicated algorithms failed terribly. Investors attempted to quickly offload digital assets before an algorithmic stabiliser could kick in.

At below $1, Terra can be exchanged for Luna tokens and vice-versa. In principle, this should maintain both values steadily. In a way, it’s like creating money from nowhere using a complicated mix of smart contracts to keep each UST token’s value near $1.

Are StableCoins Dead?

Specialists say the extraordinary volatility was due to technological teething problems. In other words, Terra Luna and UST’s demise are part of the growing pains of a rapidly evolving market.

However, given this recent news, the short-term prognosis of other Stablecoins is hard to predict. Investors may abandon stablecoins if they lose faith in the system that ensures their value.

Additionally, other currencies are heading downward at the moment. Some analysts stated the issue demonstrated the strength of other coins. According to them, the true story of the day is the relative strength of the Bitcoin and Ethereum giants.

However, back in November, Joe Biden recommended that Congress order stablecoins to be issued by federally licenced banks, protecting investors and preventing as much unpredictable volatility for stablecoins.

Will $LUNA and UST Recover?

The Luna Foundation Guard aims to revive UST through a $1+ billion campaign to help them reach its goal of increasing the stablecoin’s value and restoring parity with the dollar.

However, LUNA is highly volatile, so the market might bring it back down even if it recovers.
But, the question on everyone’s mind will be: if a “stable” digital asset can be wiped out almost instantly, are any digital assets safe?

Jack Goodson has written about cryptocurrencies and NFTs for PC Guide - an area he is hugely interested and has plenty of experience in.