The Terra ecosystem is burning to the ground, or so it seems. Not only has its native cryptocurrency, $LUNA dropped up to 95% in the past week, but as of Wednesday, May 11th, its $UST decentralized stablecoin had crashed down to the shockingly low price of $0.25, down from its peg of $1.00.
Even before the May 6th announcement by the Federal Reserve to raise interest rates by half of a percentage point – the biggest hike in two decades – there was already a lot of fear in the crypto market. Uncertain economic stability was already doing a great job of creating an off-risk environment, but after the news dropped, there was a noticeable upswing in price volatility across the board. No ecosystem; however, has been decimated more so than Terra has been this week, although some recent reports conclude this to be more of a coordinated attack rather than any fault of protocol’s own.
It appears as though at some point during the early hours of May 8th some crypto whales began offloading hundreds of millions of $UST on both Curve and Binance. As if that wasn’t suspect enough, concurrently these same people also began taking out short positions on $LUNA. If true, this does seem to dictate that this was some sort of planned attack against the Terra ecosystem.
Simply put, due to the inherent nature of Terra’s balanced programming, $UST is meant to maintain its peg by utilizing basic supply and demand to maintain it. In this case, with market pressure forcing $UST to begin losing its $1.00 peg, the protocol had to continue minting more $LUNA until $UST could reach its target price. So these market pressures between the Fed’s interest rate hike mixed with the recent whale activity pushed $LUNA’s price to amazingly lower lows. Moreover, these events led to a seemingly never-ending increase in retail investor FUD within the ecosystem, and the user incentives weren’t enough to make the bulk of investors risk anything more than they had already lost.
In addition to these incidences, there was yet another catalyst for falling prices. The Luna Foundation Guard (LFG) – their Singapore-based non-profit created to support and protect the ecosystem – had to entirely liquidate their 80,394 in Bitcoin reserves in hopes of regaining $UST’s peg. The LFG had been stacking BTC this past year to do exactly that; however, the crypto markets at this stage are already in a severely weakened state, and being forced into selling their reserves had the unintended side-effect of bringing down the price of BTC even more, which dragged the markets down even further.
All of these events fed off of each other creating an avalanche of negativity and mistrust in not only the protocol but the founders themselves as well. Do Kwon isn’t staying silent on the matter either and even though there is a lot of pressure on him from many investors for the unprecedented losses, he seems to be focused on the task at hand. Kwon, who is known for his consistent reliability in interacting with the Terra community, said on Twitter today that the only way Terra can move forward is to absorb the stablecoin supply of all those who want to exit before $UST can even begin to “re-peg”.
He also stated that to combat the falling price of both coins and maintain homeostasis, he endorses community proposal 1164, which is meant to increase the minting capacity and therefore supposedly allow the system to absorb $UST more quickly.
Will Do Kwon be able to dig himself out of this? Of course, only time can tell but it seems as though there is still a lot of interest in Luna’s revival, albeit without UST, either way, it’s going to be a long road ahead.