The ecosystem of Terra Luna suddenly crashed. It was a huge crash and had many consequences. It impacted investors and widely the crypto ecosystem. Various investors lost their whole life saving they parked in the stablecoin, Terra. Before the crash, it has a market cap of more than $18 billion. Visit https://www.bitprofit.software official website for trading.
Terra is the blockchain focussing to develop stablecoins pegged to fiat currencies like GBP, USD, and so on. Rather than making use of cash for backing and maintaining the peg of UST to a dollar, it utilized one algorithmic mint. It burns mechanism for helping to keep one UST to one USD.
The way of working is unique. Terra was built with two coins. The token used to stake is Luna. It is used for governance and also transaction fees on its network. It is also used for helping the second coin, UST to maintain its dollar peg. For minting UST, an equal amount of Luna must be burned and vice versa. For example, to mint 10 UST you will need to burn $10 priced Luna. The entire system is dependent on arbitrageurs UST burning. It happens if you trade it below one dollar and mint it if you trade above one dollar for gain.
So minting or buying a lot of UST will result in burning Luna. Luna will thus become deflationary. Burning or selling UST will be resulting to mint more Luna and thus it will become inflationary.
Big lessons learned from the crash of Luna
- No too big to fail is there in cryptocurrency: Regardless of how big is the ecosystem, any sudden shake will wipe all out within a few days.
- Luna comes with over 100 apps. They are built on top. Still, they went to zero.
1. Complexity is not good:
- Without any doubt, Luna and UST mechanism is never too easy to understand.
- The more complex it becomes, the bigger will be the vulnerability.
- You can see it clearly.
- It got beaten on its game.
2. Backing of virtual coins could not save anyone:
- As per the data from a reliable source, Terra includes the biggest virtual coins in the space.
- It has the likes of Galaxy Digital, Coinbase Ventures, and many more.
- Recently it even secured a huge round of money for building its reserves.
- Those virtual coins are helpless today.
3. Some mechanism does not work
- The algorithmic mint and burning stablecoin were tried many times. But it failed.
- Terra is different. It is because none of those actually was a layer 1 blockchain that was specifically designed for stablecoins.
- Terra only ended up like them.
- The takeaway is that unless anything else is included in such a mechanism, its success is just on theory.
- Terra tried to add one outside reserve BTC.
- Yet unfortunately, it never came to life.
Don’t go all into anything
- It is a lesson everyone learns every time.
- Many people post on Reddit that they have put their savings into the ecosystem of Terra.
- Some even borrowed huge money to receive a higher Anchor yield.
- Many places their friend or family’s saving into it.
- Community matters. So never try to go all in.
- Do not go in without explaining all risks.
Nobody knows the complete story of the meltdown such as who caused it. No one wishes to predict it. But due to low pool liquidity, UST began to lose its peg to the dollar. It gave rise to de-pegging fear. So people started withdrawing UST from Anchor. It is the saving protocol in the blockchain of Terra to move out of the crypto market. Within a few hours, a lot of UST was sold on the blockchain. It caused huge minting for Luna. Luna’s price began to sink too. Short-sellers joined the game. It was red everywhere. For giving an idea of the situation, and how bad UST selling was, the order book of Binance was emptied completely. A lot was lost. Most of it was from different retail investors. It was a devastating expression when such horrible events were witnessed. But blaming will never help. We all can learn from it. We can sympathize with everyone who lost all their fortune in this crash.