Price Movements and Market Impact
The ongoing crypto downturn has seen many cryptocurrencies lose 20% of their value. However, Terra’s LUNA has been hit harder, dropping by 78%, while its stablecoin, TerraUSD (UST), has fallen by over 61%, bringing its value down to $0.39.
This week, UST lost its peg, which led to a price dip as low as $0.66 on Monday night. However, it somewhat recovered to $0.90. Unfortunately, Wednesday wasn’t a day of recovery for Terra, as seen in this historic decline.
Despite efforts earlier this year to establish the Luna Foundation Guard (LFG) to back the reserve for LUNA and liquidating some of its Bitcoin assets to maintain UST’s peg, the price continued to drop. According to CryptoChipy, these Bitcoin liquidations are part of Luna’s $10 billion Bitcoin purchase goal. It is now estimated that they still hold around $2 billion in BTC, which might be used further unless a newly approved solution with much higher minting rewards helps UST re-peg to $1 again.
Possible Reasons for the Decline
Algorithmic stablecoins, like UST, can benefit from asset backing, such as Bitcoin and LUNA, or even real US dollars. However, without centralized third-party backing, if the assets are interrupted, the stability of these coins is affected. This is the case with UST.
A part of LUNA’s decline can be attributed to the Terra foundation selling more tokens on the open market to support UST. LUNA could be traded 1:1 for UST, which resulted in an increased supply and, subsequently, a massive drop in LUNA’s price over the last 24 hours.
Anshul Dhir, the COO and co-founder of EasyFi Network, has raised concerns, advising investors to be cautious when investing in algorithmic stablecoins.
His statement emphasizes an inherent risk in algorithmic stablecoins. He suggests that investors should not blame the industry or the founders of the project, but instead understand the risks involved before making any investments. Anshul also pointed out that the risks lie with both the founder and the participants in the project.
In this regard, Anshul Dhir absolves Terra from direct blame and shifts responsibility to everyone involved. The Terra foundation has released the following statement:
1/ The ongoing pressure on $UST due to the current supply imbalance is causing severe dilution of $LUNA.
The key challenge is removing bad debt from UST circulation quickly enough to restore the system’s health.
— Terra (UST) ?? Powered by LUNA ?? (@terra_money) May 12, 2022
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What’s Next for the Recovery of LUNA and UST?
In light of the drastic drop, the founder of LUNA and TerraUSD (UST), Do Kwon, announced a recovery plan aimed at stabilizing the projects. The Terra community voted in favor of increasing minting rewards by 3x. However, Kwon’s motivations go beyond this, as he has personally wagered over $10 million on the success of Terra LUNA.
In his tweet, Kwon outlined plans to acquire over $1.5 billion to purchase more Bitcoin from investors willing to support his projects. Additionally, Terra is actively seeking new large VC firms to join as investors, bringing fresh ideas to the ecosystem. Multiple steps are being taken to restore the peg, but these efforts have severely diluted the value of LUNA.
2/ Several measures are being taken to accelerate this goal. The current Prop 1164 will increase the base pool size and speed up the burn rate of UST, helping to reduce on-chain spreads.
— Terra (UST) ?? Powered by LUNA ?? (@terra_money) May 12, 2022
