The duo from TerraUSD and Luna were unable to maintain the dollar peg and were withdrawn from trading on the largest crypto exchanges.
What about Terra and the Luna?
Terra is a blockchain that allows users to create stablecoins linked to fiat currencies. The platform token is the Terra currency. It works in conjunction with the LUNA network token, which is a utility token and a management token.
Terra was founded by Do Kwon and Daniel Shin of Terraform Labs. Terra provides smart contracts with the ability to create various stablecoins. Terra already has stablecoins linked to various currencies: the US dollar, the South Korean won, the euro and others.
It is worth noting that the Terra stablecoin maintains its price due to the built-in arbitration mechanism. Arbitrage is the simultaneous purchase and sale of an asset to benefit from small price discrepancies in different markets.
Here’s how it works: if the token price falls below $1, the system issues additional Luna coins. Terra USD is automatically exchanged for them until the value returns to $1. This also works in the opposite direction.
Why did the crisis occur?
Since TerraUSD is an algorithmic stablecoin, its price remains stable due to the arbitrage mechanism that is written in the code.
When Terra USD lost its binding, the arbitrage mechanism could not solve the problem for the following reasons:
- Terraform Labs used a bitcoin reserve to solve the problem, but this did not help to stabilize the peg to the dollar.
- The price decrease was aggravated by the actions of investors who began to sell TerraUSD in a panic.
- Also during the operation of the arbitration mechanism aimed at restoring the stablecoin binding, the Luna offer increased (which reduces its cost). In this regard, investors also began to actively sell Luna.
In addition, when the price of LUNA dropped by more than 33% in 24 hours, the USD stablecoin dropped below the parity of $1 to $ 0.93.. In this regard, the terra usd (UST) stablecoin lost stability, falling to $0.932008 per token. At the same time, the LunaFoundation Guard bitcoin wallet and the secure Ethereum Gnosis address were emptied. The price of LUNA strongly affects the Terra UST stablecoin as a result of the crisis, more than $830 million was liquidated from the crypto economy, and the price of bitcoin (BTC) fell to a minimum not seen since January 2022. In addition, many crypto assets suffered more serious losses as terra (LUNA) fell by 33.3%.
Against the background of the Terra crisis, the largest crypto exchanges withdrew TerraUSD and the associated Luna token from trading. The Binance crypto exchange suspended the withdrawal of Luna and Terra toxins on Thursday, May 11. Also included in the world’s top ten crypto exchange, the OCX first stopped the withdrawal of Luna, but decided on May 14 to resume work with the token.