.png){kind=logo}
- Insights
- Cryptocurrencies
- Stocks
- White Papers
- Industry
- Geography
- Insights
- Cryptocurrencies
- Stocks
- White Papers
- Industry
- Geography
The cryptocurrency market has crashed heavily. Terra was trading at $118 last month and was positioned as the eighth largest crypto token. However, it saw the worst of its day earlier this month when the price tumbled down to $0.09. The major reason for the downturn was the loss of its dollar peg, which eventually led to the crash in LUNA prices. But is Terra Luna a buy now even after the crash? Let's see.
Just a few weeks ago, Terra was one of the top 10 best cryptocurrencies. The crypto declined by over 95% in a matter of 48 hours. However, some market experts believe that Terra LUNA could be a buy now even after the crash, as the volume of the LUNA token remains impressive. Analysts say that LUNA would certainly take some time to recover from this erosion, making Terra likely a good buy now.
Terra is an Algorithm-backed stablecoin that provides a growing array of decentralized finance applications. The Terra Network has a collection of fiat-pegged tokens or Terra stablecoin and a stabilizing crypto asset. Terra is tied to the value of fiat currencies. LUNA absorbs this stablecoin price volatility. But LUNA has eroded its value to become merely a penny token recently.
UST lost its dollar peg leading to the crash in LUNA prices as both UST and LUNA are interconnected. A LUNA is burned for every UST traded and vice versa. The market cap of LUNA has plunged down to less than around $300 million.
Virtual currencies are highly volatile. Your capital is at risk.
The Terra stablecoin has a unique mechanism to maintain price stability known as a built-in arbitrage mechanism. Terra's algorithmically-governed blockchain protocol offers a collection of stablecoins. The price is maintained by using Terra miners, as they burn or mint Terra stablecoins and LUNA.
By balancing supply and demand, the protocol stabilizes Terra stablecoin's price. To gain price stability, the LUNA pool and Terra pool execute quick swaps. The Terra protocol works as a distributed ledger, maintained by validators on the network. The network has a unique consensus mechanism known as Delegated Proof-of-Stake (DPoS), where validators would vote on blocks and earn LUNA tokens as rewards. By participating in the PoS consensus mechanism, Terra miners play an instrumental role in security. Additionally, this helps in stabilizing prices by absorbing short-term volatility in demand. The network achieves stability by mining rewards with a contracting and expanding money supply.
Before this crash, Terra was the second-largest decentralized finance ecosystem, and the booming array of DeFi applications on the blockchain created an increased demand for TerraUSD. Thanks to the built-in arbitrage mechanism, the Anchor and other DeFi products on the platform increase the demand for TerraUSD, leading to the burning of Luna, and ultimately making the LUNA a buy even after the crash.
Virtual currencies are highly volatile. Your capital is at risk.
Assets that are pegged to the price of a single commodity, currency, or financial instrument are called Stablecoins. Typically these are pegged to fiat currency such as the dollar. Stablecoins like Tether, the first generation of stablecoins, maintain their price using a basket of assets, including fiat reserves. Stablecoins also underpin a growing DeFi ecosystem for the masses.
But the downturn of Terra has highlighted the risk with algorithmic stablecoins. With the spike in the supply, the TerraUSD lost its peg, and the arbitrage mechanism failed to resolve the issue. Moreover, as the stablecoin continued to plunge, panicked investors started selling, adding to the downward pressure in the larger market.
But several promoters of decentralization argued that a centralized entity introduces a single point of failure into the system. This brings numerous risks, such as opacity over governance structures, creating an unnecessary focus for regulatory attention. But decentralized stablecoins like Terra aim to avoid these governance issues by maintaining their pegs through algorithms instead of through vast reserves of cash and debt.
Moreover, the recent LUNA crash has also exposed some major loopholes in the algorithm-backed stablecoins. Experts say that the industry needs to take action and address the concerns of the investors publicly. Some suggested that in order to stabilize the ecosystem, UST needs to move towards its $1 peg from its current $0.55 trade value. With this process, LUNA will be distributed, and the unit value will likely remain stable and modest.
Virtual currencies are highly volatile. Your capital is at risk.
So far, May 2022 has not been a great month for the cryptocurrency market as it has been facing an unprecedented crash the past week. At the time of writing, Bitcoin's price stands at $29,902. However, one of the biggest cryptos negatively impacted appears to be Terra Luna (LUNA), which crashed over 99% on May 13, as per CoinMarketCap data. And the reason behind this is the 'de-pegging' of TerraUSD (UST) stablecoin.
Looking at the current state of LUNA, priced at $0.0001822, it is hard to believe that the coin was valued at more than$100 a few weeks ago. LUNA investors were wiped out of over 95% of their wealth in just a handful of days. LUNA's price is now more than 90% below its all-time peak of US$118, as seen in April.
What happened to Terra (LUNA), which some traders that rushed to buy Terra LUNA crypto coins did not know, was inflation of the circulating supply.
The severe inflation prompted the Terraform Labs team to halt the Terra blockchain, but the damage had been done. Hyperinflation caused the LUNA supply of coins in circulation to hyperinflate from around 350 million to 6.5 trillion, an over 18,000 times increase.
By the law of supply and demand, if there is 18570x more of something, it becomes as much less valuable per unit. It is no longer as rare or scarce. Notably, crypto has been referred to as digital gold by many experts, including the Winklevoss twins, billionaire founders of Gemini Exchange.
In addition, investors panic selling their LUNA holdings, and liquidations resulted in LUNA dropping over 99% from its all-time high of $119 to under a dollar, then 99% again to one cent, then 99% twice more to its current 2022 low. It did not help that Bitcoin dropped under $27,000, and the S&P 500 under 4,000 on the same day, for the first time in over a year.
Considered one of the most regulated, safest crypto platforms for beginners, eToro.com suspended LUNA trading at just under one cent – saving those who wanted to buy LUNA crypto tokens from two of those 99% drops. However, the question right now is – will Terra Luna come back?
Virtual currencies are highly volatile. Your capital is at risk.
One way for LUNA to recover to anywhere close to its former high of over $100 would be to burn large amounts of the LUNA circulating supply from the 6.5 trillion back to somewhere near the 350 million it was before the crash. However, that is no easy feat.
Another big question is will the broader crypto market recover? Bitcoin is holding stable at around $30,000 but has yet to break out to the upside. Based on past market-wide crashes and recoveries, it is safe to assume that the market will recover, but probably not very soon.
After first proposing a Luna recovery plan that prioritized absorbing the UST supply, the co-creator of Terra, Do Kwon, has now offered an alternative idea that would restart the Terra Luna ecosystem and focus on saving the Layer-1 instead.
In an attempt to promote LUNA's recovery and compensate token holders, Do Kwon put forward a collaborative plan of action with the Terra community. His post on the Terra Agora forum released a specific short-term timeline for this recovery plan.
Within this action, Terraform Labs planned to hold a governance vote on Wednesday, May 18, on whether to pass a hard fork for Terra, similar to the famous DAO hack the Ethereum network experienced in 2016, which split blockchain networks into two tokens, Ethereum (ETH) and Ethereum Classic (ETC).
In this case, the current worthless LUNA tokens will get converted to Luna Classic (LUNC) once the fork occurs. Holders, stakers, and developers of LUNC will be rewarded with brand new LUNA tokens that will be capped at 1 billion. If everything goes according to the CEO's plan, the new LUNA network will be launched on May 27th.
The Terraform Labs CEO explained that the Terra ecosystem, its developers, token holders, and strong brand name will be preserved by implementing this plan. Of course, this remains just a proposal, and without a consensus among the Terra community, it might not happen.
The alternative path towards a Luna recovery proposed by some Luna holders involves a Luna burn. By destroying much of the circulating supply, they hope will help LUNA recover its price and come back to its previous position in the near future.
Virtual currencies are highly volatile. Your capital is at risk.
The Terra ecosystem adopted UST as a stablecoin, leading to the interlinking of LUNA and UST. A stablecoin is linked to an underlying asset, such as a precious metal like gold or the US dollar. UST recently de-pegged to $0.45 from its value of $1, marking a drop of about 55%. Since both UST and LUNA are interlinked, the massive fall in UST value has resulted in LUNA's overall crash.
So will LUNA come back and recover its previous highs? Learning more about the LUNA tokenomics will help us understand the possible LUNA recovery process.
What happened to LUNA was different from other crypto crashes because of what the LUNA crypto asset is. The protocol enables stablecoins created for decentralized finance (DeFi) applications.
Anyone could use it as a payments network without the need for a central bank, any banking institution, or a centralized entity like Visa – people could be their own payment processor. In the words of Goldman Sachs, DeFi is 'easier to access for underbanked populations and provides faster settlements for users.'
Virtual currencies are highly volatile. Your capital is at risk.
Considering Terra's strong fundamentals and price history, investors are curious to know if LUNA is still buy-now crypto, even after the crash. Several market experts are still bullish on the future of LUNA and expect the token to recover in the future. Although many believe that the UST will take some time to be pegged, it is likely to recover sooner. LUNA, on the other hand, might take longer to regain its strength. But in the future, Terra would again position itself as a good buy in the market.
Terra offers significantly lower transaction costs and continues to build a more rigid infrastructure with DeFi tools and assets that users can seamlessly enjoy. As a result, the majority of the industry experts suggest investors not get caught up in the panic and sell LUNA before it stabilizes after the carnage.
Virtual currencies are highly volatile. Your capital is at risk.
