What is Terra Luna? Why did it Crash 99%?
The Terra (LUNA) crypto token crashed from $120 to $0.68, a 99.5% correction, of which 98% was within one day in a black swan event.
The stock market corrected, with the SPX moving down under the 4,000 level for the first time since May 2021, and Bitcoin retraced under $28,000 for the first time since Jan 2021 – altcoins are often correlated to Bitcoin strength or weakness, and the crypto markets’ correlation to the S&P 500 as a whole hit a 17 month high in March 2022.
The reasons for the LUNA crash are deeper though, and are a warning on crypto price volatility.
What is Terra (LUNA)?
You’re not alone in wondering, at least 500 people search ‘what is Terra Luna’ in search engines like Google per month according to keyword tool Ahrefs.
Technically Terra is the name of the crypto asset, and LUNA is its ticker symbol.
More people still refer to the LUNA crash rather than the Terra crash however, so as not to confuse it with stablecoin TerraUSD, ticker UST. Although UST crashed too, despite being a stablecoin.
What is Terra Blockchain
- Platform to create stable coins pegged to fiat money
- Powers global payments systems with fast and affordable settlements, like Alipay on the Blockchain
- Mainnet went live April 2019. Custom blockchain on Cosmos SDK
- Offers stable coins pegged to USD, South Korean Won, Mongolian Tugrik, the IMF’s SDR reserve asset, and planned more options
- Company alleged to be backed by $3.5 billion in Bitcoin reserves in case something goes wrong – one of the top 10 BTC holders
What is Terra Crypto
- Ticker Symbol LUNA
- When stablecoins de-peg slightly, LUNA is sold / burnt to stabilize them
- ICO Price $0.80
- Historical Low of $0.40 on Binance in August 2020
- Hit All Time High of $119.55 in April 2022, a 300x gain
- Became 6th largest crypto with a market cap of over $40 billion – now 41st with $1.5 billion
- LUNA validators also receive rewards
What is TerraUSD
- Ticker symbol UST
- A stablecoin pegged to the US dollar, like Tether (USDT)
- Investors earnt 20% APY (annual yield) staking UST on Anchor Protocol, other crypto platforms
- Crashed from $1 to $0.30
- Was top 10 crypto asset – still #11 with $9.6 billion market cap
- Stable coins USDT, USDC and BUSD have higher cap
Both Terra (LUNA) and TerraUSD (UST) were created by Terraform Labs, founded in 2018 and located in Seoul, South Korea. At the center of the story is Terra Labs CEO Do Kwon.
The idea to create an ‘algorithmic stablecoin’ where LUNA could be burnt in order to ‘mint’ UST to stabilize it whenever it loses its 1:1 peg to the dollar, and vice versa, is different to how other stable coins like Tether (USDT) and USD Coin (USDC) function. For example if UST hit 0.99, a small amount of LUNA would be burnt, and if it hit 1.01, a small amount of UST would be burnt.
It worked, until it didn’t.
It has now even emerged that Do Kwon has been behind a failed stablecoin crypto project in the past, called Basis Cash, in breaking news today on Coindesk and Yahoo Finance.
Why UST lost its peg, no one knows, and Do Kwon hasn’t given an explanation to investors and the public. One rumor is that this was a co-ordinated attack in order to exploit Terra and cause a Bitcoin crash, so that ‘whales’ would be able to buy in at a cheap level.
Why Did Luna Crash?
The 30 year old Do Kwon had something of a reputation on Twitter for arrogance, in some circles, so some think it may have been a personal attack as well. One theory was put forward by the founder of Cardano Charles Hoskinson, although he later deleted the tweet.
He tweeted that a large institution borrowed 100,000 Bitcoin from Gemini exchange. They then exchanged a large amount of that BTC for UST over the counter (OTC) with Do Kwon at a discount. He agreed, lowering the UST liquidity.
That institution then allegedly dumped large amounts of both BTC and UST on the market causing a liquidation cascade of leveraged longs, slippage and panic selling by investors, many of which sold their LUNA holdings and unstaked their UST to sell it.
The tweet alleges that Terra was a ponzi scheme that didn’t have enough BTC reserves on hand to prevent that crash. None of these claims are verified and Gemini denied issuing any such loan. However market manipulation is common in all financial markets.
Hoskinson (@IOHK_Charles) later tweeted that even if Gemini’s tweet is accurate, someone did launch an attack on Terra. Who that was is unknown for now, and social media is rife with speculation and different explanations.