Pulling apart the biggest story in crypto
After a massive sell-off led to Terra’s stablecoin UST losing its US dollar peg earlier this week, the organization’s native LUNA token also went into free fall. As LUNA lost 100% of its value in the past 24 hours and UST fell as low as $0.14, Terra network validators have now paused the blockchain. They hope to apply a patch to restart operations and avoid potential attacks.
Terra became more susceptible to attacks as LUNA is the governance token of the network. Due to its incredibly low price, bad actors could potentially take control of the network by gaining a large portion of LUNA tokens at a discounted price and using them to sway governance votes.
Terra overshadows bear market
It’s not often in a week that BTC and ETH have lost around 20% in value, but another story dominates headlines. However, that’s exactly what’s happened this week as all eyes rest on Terra. The network made headlines earlier this year, climbing the TVL charts at a lightning pace. Terra employed a cryptocurrency strategy to back its stablecoin UST, which is now in serious doubt. Terra halted operations of its blockchain to mitigate the risks of a governance attack.
In another tweet around 2 hours later, Terra developers announced that the blockchain had continued block production, while they disabled staking on the network. Terraform Labs, the creators of LUNA and UST, have also waded in and unveiled a series of steps to rescue the Terra ecosystem following the collapse of UST and LUNA and most tokens in the Terra ecosystem.
In a nutshell, Terraform Labs has said it would burn any remaining UST in the community pool, burn any UST on Ethereum, and then stake $240 million worth of LUNA to avoid likely governance attacks. In human language, they plan to let hyperinflation of LUNA absorb the bad UST debt. However, one spectator on Twitter was quick to point out that the security of the Terra network would diminish as the price of LUNA is decreased by hyperinflation, leaving the blockchain unsafe to roll out such a plan of action.
LUNA loses more than $40B value
A lot of people would have been negatively affected by the outcome as Terra had been hyping a lot lately after climbing the TVL ranks at lightning pace. It seemed from the outside Terra was on a one-way path to success. How quickly things can change in the cryptocurrency space.
LUNA at writing is valued at $0.00002871, a magnificent fall from grace that saw 100% of the value wiped off the token in less than a week as it fell from around $80 starting Sunday, May 1.
What about USDC, USDT, BUSD, and DAI?
There had been fears that other major stablecoins, namely USDT and USDC were also being affected. Both deviated from their respective dollar pegs this week. USDC hit a high of $1.05 while USDT has seen action on both sides of $1.00. MakerDao’s stablecoin DAI has also been affected as it saw a high of $1.02 and a low of $0.98. Also, BNB Chain’s stablecoin BUSD saw fluctuations, rising to $1.05 on May 11. Importantly, all are now stable.
Moreover, the fluctuations are believed to be caused by arbitrage trading, which traders employ to exploit the slight differences in price between identical assets in two or more markets. One thing we can seemingly 100% rely on in a crisis is the ability of crypto traders to spot an opportunity.
Now what for Terra & UST?
It’s safe to say we are in the depths of the biggest failure in crypto’s history. UST, was the third-largest stablecoin de-pegged from the US dollar, trading at $0.14 at writing. LUNA has wholly collapsed in value, falling 100% from its all-time high, taking more than $41 billion in value. No doubt, this is one of the most significant wealth destruction events in history.
The three measures outlined by Terraform Labs include burning the remaining UST in the community pool, staking $240 million LUNA to protect the project from a governance attack, and burning any UST that still exists on Ethereum.
Terraform Labs proposes burning around 1 billion UST in the project’s community pool, a fund for financing different projects built atop the Terra blockchain. Any community member can create a governance proposal to spend the tokens in the community pool. The current circulating supply of UST is 11.2 billion, and burning the tokens from this pool would reduce the supply by roughly 10%. The second measure seeks to bridge back 371 million UST from Ethereum to Terra and burn that. This would reduce the UST supply by another 3%. The first two emergency measures would reduce UST’s circulating supply by just over 11%.
The third proposal suggests that an extra 240 million LUNA tokens be staked to protect the network from governance attacks. As mentioned, LUNA is Terra’s governance token, which means it can be used to vote on proposals within the ecosystem. The circulating supply of LUNA increased to 6.5 billion over the past week due to proposal 1164, which essentially increased the amount of LUNA that could be minted per block. However, It remains to be seen whether these measures will save UST’s peg or the price of LUNA.
Those wondering how this debacle unfolded over these last seven days can read our coverage of the initial de-peg, how it came about, and further issues as the price dropped like a lead balloon these past seven days. Once we see the effect of the foundation’s proposals, we will continue to monitor the story and provide a complete post-mortem.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.