Terra LUNA crash: Here’s why the cryptocurrency dropped over 85%

Stablecoin Terra LUNA crashed over 85% on Wednesday,
according to data from CoinmarketCap. The cryptocurrency was trading at $4.00
down by 86.76% as of 3:10 PM IST. Terra’s price has fallen more than 91% from
its record high of $119.8 it touched in April this year. The cryptocurrency
shot to fame earlier this year when non-profit Luna Foundation Guard, an
affiliate of Terraform Labs, the company behind Terra USD, pledged $10 billion
worth of Bitcoin to support its dollar peg.

Also Read | How North Korea is bribing South Koreans with crypto for military secrets

Why
did Terra LUNA crash?

The cryptocurrency tanked over 80% on Wednesday after the
Terra USD (UST), which is an algorithmic stablecoin, fell sharply to almost
$0.6. With that, Binance, one of the leading global crypto exchanges,
temporarily stopped the withdrawal of UST and LUNA. All this caused a cascading
effect on the price of LUNA, spiralling it out of control. The daily chart for
LUNA has dropped below the ascending channel pattern. Immediate support could
be expected at $4.

Also Read | California set to become cryptocurrency flagbearer in US

How
are Terra LUNA and UST related?

The success of the Terra ecosystem relies heavily on the
adoption of UST as a stablecoin, hence the LUNA token and UST are inextricably
linked. Upgrades such as Columbus-5 may lead to severe deflation of the LUNA
supply in the long term.

On the other hand, if UST is seen as volatile, LUNA’s
value may decline. Due to the Wormhole hack, UST lost its peg, causing the
value of LUNA to fall temporarily.

Also Read | Explained: How the crypto landscape has changed in India

Why
did UST de-peg?

The UST was devalued on May 9, 2022, and slipped from $1
to $0.68. At the time of writing, it was not clear whether UST will resume its
peg.

“Since Monday, Terra USD (UST) has been trading
considerably below its dollar peg, but the initial collapse to 98 cents was
only the beginning of a much larger slide. The issue on everyone’s mind is if
the project can be saved as Do Kwon’s Terraform Labs and the Luna Foundation
Guard attempt to restore the dollar peg. The extended depreciation has resulted
in massive withdrawals from the Terra blockchain App Anchor, which has seen its
balances drop by $7.8 billion or 30%,” said Melbin Thomas, Co-Founder of
Sahicoin.

Also Read | Panama approves bill to allow use of crypto assets

The UST Curve pool gradually decreased as users exchanged
UST for competing stablecoins when UST started trading drastically below its
dollar peg. The price of LUNA, the collateral for UST fell because of short
selling. The relieve the negative price pressure, Terra was forced to coin more
LUNA.

The UST rate is falling, as a result, LUNA’s value
dropped, although the peg was not reinstalled. Terran Treasury’s $1.5 billion
Bitcoin auction failed to restore UST’s faith.