Terra (LUNA) plunged from $83.04 on May 6, 2022, to $9.45 at the time of writing on May 11. This essentially means that LUNA investors’ wealth has been eroded by more than 88 per cent in five days.
Terra’s crypto Blockchain algorithmic Stablecoin, TerraUSD (UST) also lost its 1:1 ratio with the dollar and now trades at $0.6131. Before this disaster, Terra (LUNA) was among the top-10 crypto currencies by market capitalisation, and TerraUSD (UST) was the world’s biggest decentralised crypto Stablecoin, according to Coinmarketcap.
Who Is Behind Terra?
Terra has been developed by South Korea-based Terraform Labs, which was founded in 2018 by Do Kwon and Daniel Shin.
The Luna Foundation Guard (LFG) is a non-profit organisation registered in Singapore, and they are responsible for the promotion, innovation and sustainability of Terra (LUNA), its native crypto currency - TerraUSD (UST) crypto Blockchain algorithmic Stablecoin, as well as other Stablecoin and decentralised finance projects, such as Anchor, Vega, Talis, among others.
“The value of Terra’s family of Stablecoins is maintained through a system of arbitrage incentives, open market operations, and dynamic protocol levers that maintain robust peg stability and scalability of supply without the centralised control,” read Luna Foundation Guard’s website.
How Does TerraUSD Maintain Its Exchange Ratio?
A crypto Stablecoin is different from a crypto coin. This is because it tracks the value of a particular asset, say dollar or gold, and derives its price from it. The ideal ratio for all $ Stablecoins is 1:1 meaning that for $1 Stablecoin, $1 cash will be given. TerraUSD maintained this ratio using smart contracts and not any real asset, unlike its rivals.
To maintain TerraUSD’s price, the Luna supply pool adds to or subtracts from TerraUSD’s total supply, depending on the situation. Users can only burn Luna to mint TerraUSD, and likewise, burn TerraUSD to mint Luna. The computer algorithms decide the burn mint ratio and the incentives to be paid to the user for doing so.
4/ Understanding arbitrage on Terra:https://t.co/QIG3sgEwiC— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) May 9, 2022
For example, If 1 TerraUSD (UST) is trading at $0.995, then users can buy that 1UST and swap it for $1 equivalent of Luna. The difference of $0.05 is the profit of the user. In a normal market scenario, this should result in UST supply getting reduced and its price should climb back to $1. But things went horribly wrong and the algorithms failed to keep this ratio.
What Went Wrong?
6th May 2022: The crypto market has been experiencing volatility and price swings ever since the US Federal Reserve increased the interest rate, and inflation data reached market participants. Bitcoin dropped 8.4 per cent that day, and the overall crypto market cap was also down by 7.46 per cent. Click here to read more about that.
6/ Transfers from the public LFG wallets will be reflected in the LFG Reserve dashboard shortly. https://t.co/IKQmFhPNdE— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
May 7 and 8: Sometime during the midnight of May 7 and the early morning of May 8, big investors, who are also called crypto whales, began to sell approximately 285 million UST simultaneously on Curve, Binance, Anchor and other platforms. They also started to short Luna crypto currency at the same time.
Since UST and Luna are tied together by an algorithm program as explained above, this massive selling and shorting caused the balance to be put off. The day ended with UST losing its 1:1 ratio to trade at $0.98 that day, and Luna was down by 6 per cent at $76.51.
1/ The LFG Council just voted to deploy 1.5B in capital (0.75B in BTC, 0.75B in UST) to allay market concerns around UST. Some more context on why and how: https://t.co/TfaAPkzgUJ— Do Kwon 🌕 (@stablekwon) May 9, 2022
May 9: The Luna cryptocurrency lost 60 per cent of its value and was trading at $45 on May 9. TerraUSD also failed to maintain its 1:1 ratio, and continued to go lower, at one point, it was trading at $0.6841.
May 10: Terra’s founders and the Luna Foundation Guard (LFG) stepped in to control the free fall of their Stablecoins and crypto. In a series of tweets, LFG announced that they will be loaning $750 million worth of Bitcoin (BTC) to over the counter (OTC) trading firms and other market makers on the condition of repurchasing it as soon as the market conditions improve.
The LFG foundation had just recently purchased $1.5 billion worth of Bitcoin last week, taking its total Bitcoin reserve to $3.5 billion.
Refer to the picture below for a better visual representation of the current reserves of LFG as per their website.
May 11: Despite the LFG’s efforts, investors continued to sell LUNA on every rise and it was trading at $8.13, down by 76.76 per cent, and TerraUSD (UST) was trading at $0.6131, down by 34.45 per cent as of 12.15pm.
According to data from Anchor – the decentralised platform of Terra, the total TerraUSD deposits were down by 48.25 per cent at $5.086 billion, and the total borrowing was down by 65.48 per cent at $687 million.
According to data shared publicly by LFG, the total reserve balance after the $750 million Bitcoin loan stood at $125 million as of 12.17pm, which includes 80.32 million in Avalanche (AVAX), and 45.37 million in TerraUSD (UST).