The case of LUNA, TerraUSD and how to crash (without style) in the world of cryptocurrencies

if you enter Reddit to search the LUNA buyer community and its sister cryptocurrency TerraUSD, you will find a worrying message. The site’s moderators posted a gigantic list of helplines, phones around the world, to help its users in suicide emergencies.

And it is that, in a matter of days, the digital currencies they lost more than 99% of its value.

Photo: Pexels

The price of MOON at its peak —before this historic crash— I was more or less in 120 dollars. Right now, it’s ridiculously priced below 4 cents.

The fall, of titanic proportions, has erased astronomical amounts of money in a matter of days: business investments, market bets or the savings of thousands of people alike. At one point, the market for this cryptocurrency was valued 25 billion dollarsare now less than 50 million dollars.

But what the hell happened? how could they have gone so wrong? how is it affecting the world of cryptocurrencies? So let’s talk about this case.

Let’s talk about stablecoins

For those not so initiated in these matters of digital finance, the stablecoins are a type of cryptocurrency that seeks break away from volatility. The reason for its existence —in its simplistic version, but less entangled— the thing is are asset backed “from the real world”. Some are related to the price of currencies, others to raw materials or some to traditional money.

The most famous is called Tether and is supposedly backed by a reserve of dollars. In short: yes you put a dollar, you leave with a Tether. The total number of Tethers in stock, is equivalent to the number of dollars in the reserve.

Photo: Pixabay

Another of the stablecoins is GCoin what is it backed by a gold reserve. Each one is equal to one gram of the precious metal.

Some are backed by the price of other cryptocurrencies. So is the case with ICDa currency that is held at the value of the dollar, but is backed by a reserve of Ether. Without getting too entangled, that is handled in a curious way where people put more money than they receive: they reduce the risk of their investment in exchange for overcollateralize it.

And then…there are others stablecoins that are not supported “In nothing”.

They are known as algorithmic stablecoins —algorithmic stablecoins— because its functioning, its stability, depends on a mathematical function that controls the offer, the demand and the facilities in the exchange.

Photo: TerraLuna

That is the case of cryptocurrency MOON and its sister stablecoin TerraUSD, who have achieved world fame for crashing so spectacularly that they took millions of dollars between their legsputting the entire digital finance market on the line.

How does LUNA and TerraUSD work?

The price of TerraUSD I was stuck with the price of the dollar. MOON is its sister cryptocurrency that helped —thanks to an algorithm— to keep it stable.

If the price of TerraUSD rose from the dollar, users could burn a LUNA dollar to create a TerraUSD, receiving a few cents of profit. If the price fell below the dollar, users could burn a TerraUSD to create a new token to MOON.

That complicated ecosystem had kept the price of TerraUSD stable with the dollar, had balanced the supply of both cryptocurrencies and by the way, had turned LUNA into one of the most successful ecosystems in the digital world.

Although everything changed when the Fire Nation attacked… I mean, when the balance was upset.

This week the price of TerraUSD got out of control and instead of being worth a dollar, it was worth barely 40 cents. Investors try escape this crash with the system that was in progress: burn your TerraUSD to create a LUNA and sell it on the market without losing that much money. That caused a major catastrophe.

With the value of LUNA at 10 cents, every time someone burns their TerraUSD I know create 10 MOON. Doesn’t sound that serious, does it?

Although those figures are exponential: when someone burn 100 thousand TerraUSDAre crated 1 million MOON. By creating so many coins at once, the modern version of an old financial maxim happened. They printed more money.

Well, in this case, they created more cryptocurrencies than they could bear.

Before the fall, there were 386 million MOON in progress. According to estimates of The Block —a cryptocurrency market research agency— right now there are 7.1 billion LUNA tokens.

You can already imagine the tremendous megamandarriazo that meant in its value.

terra luna price crash crypto
Photo: Graph of the fall of LUNA

The most sloppy? the system MOON, as innovative as it seemed at the time, it gave benefits to users who locked their coins. If you did, your tokens from MOON they could not be sold and could not be bought for three weeks. In this fall, millions of people —who called themselves Lunatics— they are watching how their savings disappear without being able to do anything about it.

And now?

Well, the grocery store thundered. TerraLabs, the company behind LUNA and TerraUSD, is desperately looking for answers.

The LUNA blockchain was suddenly stopped, to prevent further misfortune. Binance —the well-known platform— withdrew trades from these coins and canceled their futures contracts.

The proposals for the solution do not look simple. in your account tweetr, the creator of this ecosystem, the South Korean Do Kwon, introduced uAn idea to increase the capacity of the system to create Terra USD so that it stabilizes, although this implies a loss of value for LUNA. He also commented on stabilize the system with the $1.5 billion they have in Bitcoin.

None has been officially decided and things look complicated, even more so when it has impacted other cryptocurrencies.

The impact on other cryptocurrencies

the misfortune of MOON has impacted all other cryptocurrencies —which, to be honest, depend a lot on investor confidence. They estimate that the general market of digital currencies has lost about 10% of all its value this week.

Bitcoin is at $30,000, its lowest value since 2020 and far from its all-time high.

Also ethereum had a flash of 30% of its price and other currencies known as Cardano either Solarium have also lost about 50% of its value in recent days. It’s been crazy and the market panic has everyone on edge.

The CEO of Tether —the dollar-based stablecoin we told you about above— commented on Twitter what in the last 24 hours, 300 million dollars have left.

Personal containment strategies come into play.

forums in Reddit invite people to stray a little from the market games and remember the Golden rule: only invest money that you are willing to lose or that you do not urgently need. Some tell their testimonies of how their savings disappeared in a matter of minutes. Some optimists recall “buying” more coins to take advantage of low prices, but others assume the tailspin is not over yet.

Anyway, take it light. If they had their wool invested in MOON or in TerraUSDthen we send them a big hug.

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