Friday, December 9, 2022

Terra’s LUNA And UST Collapsed And Here’s How It Went Down

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Terra’s LUNA and UST collapsed and the entire market tanked after the implosion so in today’s latest news we find out what exactly happened so let’s read more today in our latest cryptocurrency news today.

Amid the craziest week in crypto, the collapse of Terra’s UST stablecoin and the governance token LUNA became the biggest story. Amid the crash, LUNA was in the top 10 coins by market cap but it fell by 100% to a fraction of a cent, and UST which was supposed to be pegged to the dollar bottomed out at 13 cents. There were a few forces at work with the first one being the mechansim behind Terra and its stablecoin. The second was mainly panic. Most investors were unaware of what exactly happened and they rushed to the exit during the initial depegging. As mentioned before, Anchor Protocol Terra’s high-interest savings account was steadily reducing the rates that it offers holdings for depositing UST. What started at 20% and was marketed as a stable one, started to drop following the passing of the proposal 20 back in March. The proposal meant that if Anchor reserves increased by 5% the interstate will increase and if the reserves decreased by 5%, the interest rate will also decrease.

The rate was expected to drop 1.5 percentage points each month if there were more lenders than borrowers. With the itnerest rates expected to drop, UST’s number one case started to waver and for example, more than 72% of all UST in circulation was locked up in Anchor. Once it became clear that the 20% interest was not going to last and the UST holders started to leave. The UST holders were only interested in the Terra network because of Anchor and the departures meant that they had no further use for the stablecoin. So to exit, there were two options: burn and mint mechanism and turning to Curve finance as the second option.

Swapping and burning UST for LUNA means mining more LUNA and diluting the supply and dropping the price of the token so the price of LUNA dropped whether you swap 1 UST for $1 worth of LUNA which emans you will have luna to hit the $1 point. The price of LUNA could drop so low that there isn’t enough liquditiy to provide an escape hatch for all UST coming in. UST depegged by less than $0.02 as Anchor departees swooped in and started flipping UST for any other stablecoin. The pool that allowed for the trades became unbalanced and meant there was more UST than other stablecoins in the pool.

Ultimately, LUNA’s price continued crashing as folks ditched UST and sold their LUNA until the price was so low that there wasn’t enough runway for UST and created an enormous amount of debt.

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