A lot of people are losing a lot of money as cryptocurrency Luna and stablecoin TerraUSD or UST, continue to plunge into the depths.
The problems that have lead to this downfall are numerous, but the main cause of the tanking price is due to UST and how it functions. Unlike other stablecoins which are linked to fiat or some other real-world store of value, UST is an algorithmic stablecoin.
“Every time a TerraUSD token is minted, the equivalent of $1 in Luna is burned, and vice versa,” Fortune writes in an explainer piece.
“When the price of TerraUSD drops below $1, traders can burn TerraUSD, or remove it from circulation, in exchange for a dollar in Luna. This reduces the supply of TerraUSD tokens, and therefore raises the price of the token,” the publication adds.
As you might be able to guess, this sort of system could be prone to catastrophic failure, and this week that happened. The market volatility we’re seeing this week across all cryptocurrencies combined with failures on Terraform Labs’ to process transactions likely spooked owners and the value of UST dropped to as low as 22 cents.
Luna on the other hand is currently sitting at $0.004150 and its price has dropped 90 percent over the last week according to CoinDesk.
It’s a failure of the sort we haven’t seen for a while and those who invested in Luna and UST are primed to lose millions depending on how much they backed the project.
As with most matters regarding cryptocurrency, the situation with Terra is incredibly complex and the downfall of the cryptocurrency can’t really be attributed to one reason. Many experts cite interest rate hikes and high inflation for the cause behind the current volatility we’re seeing in the space.
However, questions are now being raised about Terraform Labs especially its Anchor Protocol. Perhaps more concerning is allegations that Terraform Labs chief executive officer, Do Kwon was behind another failed algorithmic stablecoin known as Basis Cash, which appears to have fallen in a similar manner to how Luna and UST are now.
We highly recommend watching YouTube channel, CoffeeZilla’s coverage of Luna and UST in the video below as well as this deep dive into how the situation came to pass and highlights a number of concerns about Kwon.
There’s a bloodbath in the cryptocurrency market and while Bitcoin appears to be rallying, experts don’t expect this to remain the case for much longer.
[Image – CC 0 Pixabay]
