Amid the ongoing turmoil of the crypto market, the cryptocurrency which faced the real heat was Terra’s LUNA. The native cryptocurrency of Terra blockchain LUNA fiercely nosedived up to 75% in the last 24 hours and nearly 90% from its all-time high of $119. Currently, LUNA is being traded at around $15 at Binance. The FUD about Terra Stablecoin (UST) has fueled this massive sell-off that dragged down LUNA’s price to a record low since it touched the ATH.
Reason behind LUNA declines
LUNA is a native cryptocurrency of the Terra ecosystem that usages it to create an equilibrium and stabilize the price of UST, Terra’s stablecoin. LUNA is pegged with the UST and equipped with a unique burn mechanism that ensures the stability of UST. Any UST holder can redeem it for a LUNA for $1, and the Terra ecosystem burns that UST and vice versa.
Unlike USDT, UST is an algorithmic stablecoin and hence not backed on 1-1 basis by US dollars. Lately, the LFG (LUNA Foundation Guard) that manages UST planned to buy BTC worth $10 billion as collateral for Stablecoin.
With the ongoing decline of the crypto market and Bitcoin, the UST fell below its $1 USD peg. This caused a panic situation, and UST holders started dumping their funds for another stablecoin to avoid major loss. In order to avoid any further decline in UST value, the Terra management minted more LUNA to restore faith; however, the new mint did not help stop the decline of UST but contributed to increasing sell-off pressure on LUNA and consequently driving the price to a record low of $15.
The LFG also sold Bitcoin worth $1.5 billion to restore UST to its pegged value. However, the plan did not succeed. Instead, many analysts believe that it contributed in the plunge of BTC prices and drove down the entire crypto market.
After regaining the ground for a while, UST price witnessed a sharp decline to $0.71. Despite all efforts from the Terra, the LUNA price continues to decline.
The current scenario raises many questions regarding the underlaying mechanism of UST peg and relevancy of LUNA is maintaining the stability of TerraUSD.
Camila is working as a Senior Writer with Coinfea. She has completed her bachelor’s from a reputed college. She loves to write about trading technologies like crypto and blockchain.