Down to Zero: Terra Luna Crash and its impact on the adoption of cryptocurrencies
The world of cryptocurrencies has been steadily growing in size, interest, and value. In fact, as of 2021, around 106 million people around the world use cryptocurrencies, and financial analysts say that by 2025, the global blockchain market will grow by $39.17 billion US dollars.
Sadly, with the recent crash in the cryptocurrency market that affected stablecoins and altcoins, people were once again faced with the stark reality that at the heart of cryptocurrencies lies many uncertainties.
The spotlight is on Luna, a stablecoin founded by Daniel Shin and Do Kwon in January 2018. The ruthless fall of Terra Luna has sent a chill down the spine of enthusiastic investors. People thought this stablecoin would be a safe haven, but they couldn’t have been more wrong.
So what went wrong? Let’s find out how Terra Luna’s story unfolded, why it collapsed, and what this chaos means in the face of an economic storm.
Stablecoins and the rise of Terra Luna
First of all, stablecoins, unlike other cryptocurrencies, are made to be “stable” in every sense of the word. Their stability is possible because they are closely linked to a traditional fiat currency, such as the US dollar, or to a commodity such as gold. For example, if you have 1,000 USDC tokens, you can exchange them for $1,000 at any time.
Stablecoins provide some of the stability that is missing from most cryptocurrencies, making them unusable as real currency, and they are a convenient and profitable way to transact cryptocurrencies. Now, let’s talk about Terra Luna. Luna is the native token of Terra, a blockchain developed by the Korean firm Terraform Labs.
Do Kwon’s company, Terraform Labs, raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built on the currency despite industry criticism of the security and reliability of the technology. Earth Moon.
Luna’s total value skyrocketed to more than $40 billion, creating a frenzy of excitement that swept through traders and startup founders, including wealthy investors. Terra Luna rose to fame in December 2021, when the value of each coin began to rise, from $5 to a high of $116 in April of this year. Terra was strategically shaped by Kwon and was once ranked in the top 10 most valuable cryptocurrencies.
How the Terra Luna algorithm crashed
In Kwon’s own words, “At the end of this process, what will be beautiful is that TerraLabs will follow the organic trajectory of everything else in the environment. Us [are] It’s going to come out of nowhere and return to nothing.”
This was Kwon’s crazy aspiration to create a decentralized system that would eventually run itself, and it seems that Terra Luna was “born from nothing and back to nothing”.
TerraUSD is an algorithmic stablecoin that attempts to maintain the same value as the US dollar by using a complex oscillation mechanism with a related cryptocurrency, which is called Terra Luna (or just Luna). While 1 TerraUSD is always supposed to be worth exactly $1, the value of Luna can fluctuate. In essence, TerraUSD uses Luna as a counterweight to maintain its peg to the dollar. It is a balance system.
So what caused Terra’s value to drop below the $1 target? For starters, Luna’s loan program, called Anchor, which promised annual percentage yields (APYs) of almost 20%, was incredibly high and caught the attention of many investors. At one point, 75% of TerraUSD coins were stored in Anchor.
However, things changed when large amounts of TerraUSD were suddenly withdrawn from Anchor due to the rumor that Terra was changing the fixed rate from 20% interest to a variable rate. This caused a panic among investors, who then started selling their Terra tokens and exchanging them for other stablecoins.
Most of the people now started exchanging TerraUSD for Luna. Ultimately, Luna’s supply skyrocketed and its price fell sharply below the pegged dollar. With more and more people throwing the Terra coin, the balance mechanism stopped and both the Terra and Luna coins collapsed.
Also, just a week before UST lost its peg to the US dollar, Kwon bragged a lot in interviews and on Twitter (NYSE:), saying that his TerraUSD coin would never become unstable. Well, life has a way of humiliating us all, and Kwon’s humility was undone by the very algorithm that he put the greatest zeal and heart into.
The consequences of the Terra Luna burn
Unsurprisingly, investors went wild after the value of Terra Luna fell below $1. It was as shocking as it was devastating. The collapse of the Terra network cost investors a whopping $40 billion.
Several crypto exchanges, such as Binance, have removed the Luna and UST pairings. On May 16, Kwon submitted a proposal to revive what remains of the Terra ecosystem. The plan is to fork the Terra chain into a new chain, without the algorithmic stablecoin. It is unclear if this will pass and Terra’s ecosystem will recover.
Later, more than 2,000 investors filed a class action lawsuit against Do Kwon, while the US Securities and Exchange Commission opened its own investigation into possible money laundering.
South Korea’s ongoing investigation into the Terra/Luna collapse is also being led by a special financial crimes unit with the prosecutor’s office in Seoul that bans former Terraform Labs Pte. Ltd. employees from South Korea. to leave the country.
One of DailyCoin’s writers, Paulina Okunyte, recently explained in her op-ed many reasons why Do Kwon should be prosecuted for what appears to be a willful act of ignorance. In her article, Paulina asks the question that is on the minds of many victims of the accident: Why is Do Kwon de Luna still not in prison?
Impact of the fall of Terra Luna on the future of crypto adoption
The cryptocurrency industry has been working hard to get the public and governments to adopt cryptocurrencies. They are pushing new financial products and trying to win the trust of governments, some of which have been successful.
However, with the explosion of Terra Luna, it is clear that some governments have strengthened and will strengthen their defenses against cryptocurrencies. What seemed to have been a marginal chance of adoption or the willingness to approve crypto is now thin as a reed.
In May, US Treasury Secretary Janet Yellen said that the decoupling of TerraUSD showed the urgency of having a regulatory framework for stablecoins, which aims to minimize the volatile price swings seen in the market. majority of cryptocurrencies, during a Senate Banking Committee hearing. Yellen added that her Treasury Department will issue a comprehensive report outlining the dangers posed by the cryptocurrency industry.
Others are even more hopeful about cryptocurrencies. International Monetary Fund (IMF) Managing Director Kristalina Georgieva urged people not to avoid cryptocurrencies altogether after the collapse of the Terra USD (UST) algorithmic stablecoin and the Terra (LUNA) cryptocurrency at the annual meeting of the World Economic Forum in Davos last month.
Nobody likes it when the truth looks them in the eye and says, “I told you so.” Many investors are aware that cryptocurrencies are risky, but perhaps in this scenario it is appropriate to say that experience is the best teacher. Although the crypto market offers tons of possibilities for a lot of financial products, it is still young and therefore a lot of things are being tested and could go south quickly. Terra Luna was just one of those things.
Some in the industry believe that algorithmic stablecoin technology holds promise and could, over time, transform the world of finance. They believe that burning the project provides an opportunity to reduce risk and design more robust systems that will withstand extreme economic shocks. Others believe that the algorithm should never be used again.
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