Recently, the price of $LUNA has dropped 99.999% from over $100 to less than $0.00002 and this massive crash has drawn a lot of attention.

Ultimately this caused the Terra blockchain to completely shutdown, being that it is centralized the owners can do this.

Screenshot of bridge.terra.money

So how did this happen?

First, its important to understand what $LUNA is and how it relates to $UST.

The Terra blockchain is unique because it is able to host a multitude of algorithmic stablecoins on its network.

$UST is (was) one of those stablecoins pegged to the US dollar.

In order to keep this 1-1 peg, Terra was supposed to work like this:

The Terra protocol uses the basic market forces of supply and demand to maintain the price of Terra. When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price.

Did Attackers Crash LUNA?

Twitter has speculated as to how exactly this crash could have occurred.

If would-be attackers created a large position in UST and then unstaked $2 billion at once, it could depeg UST, which would mean Terra’s team would have to sell portions of its bitcoin reserve to repeg the stablecoin. Once investors saw that UST lost its peg, they would then rush to unstake and sell their UST, which would require more bitcoin reserves to be sold, adding further sell pressure.

All this sell pressure, caused a “death-spiral” due to Terras algorithm minting new LUNA in order to try and re-peg UST.

The overall supply of LUNA inflated to over 6 Trillion coins at the time of this writing and market cap of less than 500M.

More to come!

P.S Feel free to join our ETC Pool for the hardest money around.

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