This month saw the value of Terra (LUNA) plummet from US$80.3 to US$0.0001702 and TerraUSD (UST)‘s price fall from US$1 to US$0.10.
The rapid drop in prices of these two currencies has been dubbed the “LUNA Crash” by experts as well as crypto community members. While the event’s name only focuses on one coin, it’s important to note that these two assets’ fates were interconnected.
So, why did the values of Terra (LUNA) and TerraUSD (UST) crash? And how did TerraUSD (UST) cause the price of Luna to go down?
Before we move forward, let’s find out the difference between TerraUSD (UST) and Terra (LUNA) below.
TerraUSD (UST) vs. Terra (LUNA): What’s the difference?
TerraUSD (UST) and Terra (LUNA) are two original tokens from the Terra network, a blockchain project developed by Terra Labs in South Korea. Until now, the Terra ecosystem has developed more than 100 projects, including Non-Fungible Tokens (NFT) and Web 3.0 applications.
Established by Do Kwon, a Stanford University computer science graduate, the Terra blockchain’s tokens were minted as stablecoins and stablecoin facilitators.
Stablecoin: A currency token with stable price, or equal to that of a certain fiat currency.
Stablecoins’ values are supposed to match with a fiat currency. A 1-to-1 price match is said to support a global payment system with a stable price as well as provide a quick and affordable completion process.
So, why did Terra (LUNA) and TerraUSD (UST) crash?
With all these mechanisms in place, you may be wondering, why did Terra (LUNA) crash? Or how did TerraUSD (UST) cause the price of LUNA to crash? Here is the explanation.
Quoting Financial Express, the decrease in the price of Terra (LUNA) is linked to the large-scale selling of LUNA tokens caused by the failure in de-pegging UST.
As explained before, TerraUSD (UST) is backed by a cryptocurrency called LUNA. You have to first burn LUNA to be able to generate UST and vice versa.
This system is designed to utilize supply and demand. So, if the demand for UST drops and its value falls behind that of USD, those who profit from market inefficiency will sell LUNA so that the value of UST can be successfully recovered.
The mechanism that supports the price of UST is semi-automatic and works well most of the time, even when many volatilities are happening. Even so, this scenario does not go well in extreme cases, like the one happening right now.
In the second week of May, the TerraUSD (UST) price gradually decreased. Quoting Business Today, the shrinking of the UST price curve could have been caused by a reaction to the devaluation of the dollar.
According to them, when the dollar value fell from US$1 to US$0.68 on 9 May 2022, investors either liquidated their UST or opted for other stablecoins as TerraUSD was trading at a price below its USD value. Furthermore, LUNA plummeted as a result of large-scale short-selling.
This analysis is supported by Jennifer Lu, one of the founders of Coinstore. Jennifer said that the value of UST, which fell to the level of US$0.60 a few days ago has successfully triggered a large-scale sell-off and caused the crash in the price of LUNA.
A bearish market worsens LUNA’s decline
Meanwhile, Anshul Dhir, the COO and Co-founder of EasyFi Network, through Financial Express, also explained that this sell-off is further worsened by the bear market conditions.
NYC Journals 