Understand why Earth (LUNA) collapsed

Startup ZenGo, the director of non-detention digital wallets, released a series of 16 tweets this Wednesday (11) outlining step-by-step instructions that led to the collapse of Terra (LUNA), which was down more than 95. %, traded at $ 1.19. Which affected the parity of the ecosystem-active stabilizer TerraUSD (UST) with the U.S. dollar, which traded at $ 0.65 and fell nearly 30% in 24 hours.

24-hour chart for the LUNA / USD pair. Source: CoinMarketCap

The company reminded its nearly 12,000 Twitter followers that sabalecoin’s goal is to achieve price stability against the fiat currency in which it is guaranteed, be it the US dollar, the euro or the Korean won, for example.

Regarding the means by which stabecoin achieves parity, ZenGo stressed that the Terra LUNA ecosystem takes advantage of one of the three main mechanisms of stability. In that case, using algorithms, without the need to set aside US dollars to maintain stability. What is done in this case is using the LUNA sign, which smooths out any short-term fluctuations so that 1 US $ in LUNA equals 1 UST.

The balance is achieved by the need to replace the LUNA with a UST of equivalent value, which regulates deliveries and thus maintains stable coin stability.

The mechanism will cause an increase in UST demand to be immediately followed by an exchange to LUNA to allow investors to make a quick arbitrage gain and help dilute supply to balance the price. Similarly, when a UST is quoted below US $ 1, the value is immediately rebalanced by an arbitrage gain obtained through LUNA, which in this case helps to re-adjust the stable coin.

On the last day of 9, the price of LUNA began to fall rapidly due to the realization of the loans, which is explained by the use of the token as a payment guarantee by ZenGo.

Pressure on cryptographic assets began to increase as liquidations began to approach the loan guarantee itself, leading to the sale of a protocol to cover the balance of LUNA, which restored the decline in cryptocurrency.

At the same time, the increase in dollar-denominated sales of cryptocurrencies caused a decline in demand for the UST, resulting in a steady decline in the price of the coin at the LUNA, which is sufficient to offset the value of the UST upward, in this case the exchange. at a cost of $ 1 per part UST holder.

Since then, the Terra ecosystem has seen massive UST sales, a pressure that has dropped a stable coin to $ 0.74 over a 12-hour period. On the other hand, the Luna Foundation Guard (LFG), which has a large amount of Bitcoins (BTC), allegedly used the reserves of 42,500 BTCs, about $ 1.4 billion, as a measure to maintain stability. In March, LFG also received $ 1.1 billion in reserves from Terraform Labs.

7-day chart of the UST / USD pair. Source: CoinMarketCap

But the market’s largest cryptocurrency also recorded significant declines, even bumping into $ 29,000 support and falling about -6.5% in the last 24 hours, as Cointelegraph reports.


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