WHAT HAPPENED TO LUNA ECOSYSTEM
THE LUNA ecosystem suffered a significant setback when its sister asset token UST lost its dollar peg, falling from $1 to as low as $0.30.
Terra LUNA is linked to a stablecoin called TerraUSD( UST) which is attached to the US traditional fiat dollar currency. The cryptocurrency serves as a safe pass in times of market volatility. This means in other to keep a $1 token value price, one is required to burn/mint a stablecoin using the Algorithmic Stablecoins Mechanism.
Algorithmic Stablecoins is a new section of cryptocurrency designed to achieve price stability and balance the circulating force of the asset by being pegged to a reserve asset similar to the US currency, gold, or any other foreign currency. One of the prominent Algorithmic stablecoin tokens is the TerraUSD interconnected with LUNA cryptocurrency. This algorithm makes $1TerraUST equal to 1TerraLUNA token. Terra uses the mechanism for MINTING and BURNING the native LUNA cryptocurrency to stabilize the price of TerraUSD(UST) and thus allows traders the ability to swap Luna token for TerraUSD(UST). The LUNA coin is mostly burnt to mint the asset coin (UST) and this decreases the price of LUNA tokens. In cases where the UST falls from $1 to 0.99 cent a little amount of LUNA is minted to increase it back to $1 and if by chance it inflates above $1 to about $1.01, a small amount of its sister token UST is minted also to bring it back to $1.
The camel-breaking news that crushed the LUNA ecosystem was the UST token’s price drastically dropping to 0.030 — 0.22 cents or thereabout due to the high minting of Luna to restore the TerraUSD token to $1. Luna token which went from 1- 50 billion mints to about 7 Trillion mints in a space of 3days under the Terra Network superseded the demand and supply market effect. This drastically affected the market price of LUNA and other popular cryptocurrencies like Bitcoin.
Binance, the most widely used exchange platform has a peer network with LUNA and UST linking other cryptocurrencies and stablecoins listed on its exchange, took laws into its hands by the CEO when he noticed the drastic collapse of Luna from intensified minting, and the Terraform Lab Team refusing to address what was happening. The CEO resulted to reporting a delisting of the Luna token from the exchange and this caused a Ripo effect (massive sell pressure order)as investors began swapping and flipping on the Binance exchange from UST/LUNA to other stablecoin like USDC Coin (USDC), Binance USD(BUSD), Tether(USDT) and Bitcoin (BTC). Luna token which was selling at about $119.18 in April 2022 according to coingecko.com dropped to selling at $0.000000999967 as of the time of writing and its sister token TerraUSD(UST) depeged from a $1 peg to selling at $0.17 published by coingecko.com when later relisted into the exchange on 13 of May 2022.
However, before the UST fall, over 70% of UST’s circulating supply was around $14 billion scheme work. UST offered a 19.5% asset yield on staking. A crypto terminology for earning the interest on a loan(staking asset) through what is known as Anchor Protocol. This by far places better value on an investor’s money than the traditional bank interest rate system and thus had more investors depositing into the scheme. When Terra the system backing the UST value which is proportional to LUNA Token crashed, the entire LUNA ecosystem felt the weight and lost its liquidity completely, thereby resulting in the total collapse of the Terra LUNA ecosystem.
