What happened to TERRA-UST-LUNA exactly and what do we learn from this?
The crypto market is in a freefall, primarily because of UST or Terra USD stablecoin. 5 days ago Terra and LUNA ecosystem stood at 14.7Bn Marketcap.
Today LUNA lost almost 97% of its value in the market. So what exactly happened?
Someone took note of the flawed tokenomics and then broke it.
To understand the hack we need to understand the ecosystem.
The Terra Ecosystem
LUNA is a token on Terra Blockchain
Terra USD or $UST is a stable coin that is pegged to LUNA
1UST is equal to 1USD always, and its price will be stable (Hypothetically)
The disastrous Tokenomics
In order to keep the price of UST equal to 1USD, it is pegged against $LUNA That means when UST prices go down because of abundance,
Holders can always burn UST and get 1$ worth of LUNA for each UST and when UST prices go up, LUNA can be burned and can get the same $ amount worth of UST.
Terra also had a reserve of around 40 thousand BTC “in Case” people started selling both UST and LUNA, it can be liquidated to save the price.
On top of that, Terra was also offering an exorbitant 20% APY to holders if they keep money in UST.
As UST was an algorithmic Stablecoin, unlike USDT and BUSD which claim to back each token with one USD.
So the value of both LUNA and UST was Speculative and according to me,
It was a recipe for disaster.
All it needed was a little push, a small nudge that came in the form of crypto volatility in recent months.
A hack or just bad economics?
Maybe someone, who took the note of how bad the economics of the ecosystem was, bought enough UST to move the market
and then unloaded it on the exchange to increase the liquidity of UST bringing the price down to 90 cents.
As expected, people panicked and started to burn UST for LUNA, On the other hand, LUNA holders started selling LUNA for USD because the price of LUNA was also falling.
This caused a chain reaction where people started selling UST and LUNA bringing the price of both UST and UST down significantly.
Here is the interesting part, You can still burn UST which costs 90 cents but can get 1$ worth of LUNA, because the price was down, this flooded the market with newly minted LUNA bringing the price down furthermore. Now UST was worth 60 cents and LUNA 20 cents from a previous high of $118 a few days ago.
Remember that 40 thousand BTC reserve? Terra liquidated it immediately to save face and the price of UST and the price goes up for a short while to 90 cents but it was too little too late.
The sell-off was started as even the BTC price was down. Terra CEO announced a plan to recover UST but right now the situation is grim at Terra HQ.
At this point in time, UST is at 59 cents and LUNA is at 6 cents. 98.3% less than its price a few days ago.
Conclusion
This is a perfect example of how economics works and also, how volatile the whole crypto market is. If you are investing in crypto, then make sure to DYOR
before buying into any project. Especially projects that claim 20% APY on their assets.
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