On Wednesday (May 11), $LUNA, which is the native staking and governance token of Terra protocol, is trading below $10, which is a huge fall from the all-time high of $119.18, which was set just over five weeks ago.
What Is Terra ($LUNA)?
The official Terra documentation has this to say about the Terra Protocol:
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“The Terra protocol is the leading decentralized and open-source public blockchain protocol for algorithmic stablecoins. Using a combination of open market arbitrage incentives and decentralized Oracle voting, the Terra protocol creates stablecoins that consistently track the price of any fiat currency.
“Users can spend, save, trade, or exchange Terra stablecoins instantly, all on the Terra blockchain. Luna provides its holders with staking rewards and governance power. The Terra ecosystem is a quickly expanding network of decentralized applications, creating a stable demand for Terra and increasing the price of Luna.“
As for the protocol’s two main tokens, it says:
- Terra: “Stablecoins that track the price of fiat currencies. Users mint new Terra by burning Luna. Stablecoins are named for their fiat counterparts. For example, the base Terra stablecoin tracks the price of the IMF’s SDR, named TerraSDR, or SDT. Other stablecoin denominations include TerraUSD or UST, and TerraKRW or KRT. All Terra denominations exist in the same pool.“
- Luna: “The Terra protocol’s native staking token that absorbs the price volatility of Terra. Luna is used for governance and in mining. Users stake Luna to validators who record and verify transactions on the blockchain in exchange for rewards from transaction fees. The more Terra is used, the more Luna is worth.“
And this is Binance Academy’s brief explanation of what Terra is:
“Terra is a blockchain network built using Cosmos SDK specializing in stablecoin creation. Rather than use fiat or over-collateralized crypto as reserves, each Terra stablecoin is convertible into the network’s native token, LUNA. LUNA allows holders to pay network fees, participate in governance, stake in the Tendermint Delegated Proof of Stake consensus mechanism, and peg stablecoins.
“To peg a stablecoin like TerraUSD (UST), a USD value of LUNA is convertible at a 1:1 ratio with UST tokens. If UST’s price is, for example, at $0.98, arbitrageurs swap 1 UST for $1 of USD and make 2 cents. This mechanism increases UST demand and also reduces its supply as the UST is burned. The stablecoin then returns to its peg.
“When UST is above $1, say at $1.02, arbitrageurs convert $1 of LUNA into 1 UST and make 2 cents. The supply of UST increases, and demand for UST also decreases, bringing the price back to peg. Apart from reducing stablecoin volatility, validators and delegators stake LUNA for rewards. These two actors play an essential part in keeping the network secure and confirming transactions.
“You can purchase LUNA via Binance and then store it, stake it, and participate in governance with Terra Station, the official wallet and dashboard for the Terra blockchain network.“
Why Did TerraUSD ($UST) Lose Its Dollar Peg?
On Monday (May 9), Jonathan Wu, who works at Aztec Network, posted an excellent thread on $UST’s de-peggging from the dollar:
And yesterday (May 10), popular pseudonymous crypto analyst “Onchain Wizard” posted a great thread on his theory of how $UST was attacked:
Price Action of $LUNA, $UST, and $ANC
Since the start of the bank run on May 8, $LUNA, $UST, and $ANC have all suffered huge losses, and are currently (as of 11:20 UTC on May 11), down 98.3%, 62%, and 97.7% from their all-time highs.
What Terraform Labs CEO Has to Say About This Situation
These are two of his tweets from yesterday:
And then around one hour ago (i.e. at 11:10 UTC on May 11), he posted a Twitter thread (addressed to the Terra community), in which he said:
- “A review of the current situation: UST is currently trading at 50 cents, a significant deviation from its intended peg at $1.“
- “The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs.“
- “Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it.“
Next, he gave an example of a remedial measure that could “aid the peg mechanism to absorb supply.”
And finally, he said:
“With the current on-chain spread, peg pressure, and UST burn rate, the supply overhang of UST (i.e., bad debt) should continue to decrease until parity is reached and spreads begin healing.“
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.
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