The sudden meltdown caused the market cap to plummet from nearly $40 billion (£32.9 billion) to just $500 million (£411 million), triggering catastrophic losses.
Why has the value dropped so dramatically and will it ever recover?
Here’s everything you need to know about it.
What is Terra (LUNA)?
Terra is a South Korean cryptocurrency.
It was founded in January 2018 by Daniel Shin and Do Kwon of Terraform Labs and according to the cryptocurrency website CoinMarketCapTerra is “a price stable cryptocurrency targeting mass adoption” in South Korea.
“Its mission is to free people from the hidden fees embedded in everyday international payments,” she says this Medium article. “They aim to eliminate inefficiencies by using blockchain technology to provide stability and adoption by e-commerce platforms.”
It is essentially a cryptocurrency made up of two halves: the “stablecoin” (more on that in Bit) Terra and Luna, a much more “traditional” cryptocoin.
Terra is designed to always be worth United States Dollars (USD) in real money, and while the price of Luna fluctuates with the market, one Terra always gets you $1 Luna and one Luna gets you Terra from $1.
That is, if Terra trades for more than $1, traders can purchase $1 worth of Luna and exchange it for more than $1 worth of Terra = profit.
If Terra trades for less than a dollar, people can buy a Terra and trade it for Luna worth $1 = profit.
This means that – in theory – if the value falls, investors can simply swap their holdings for the other half of the coin, making a quick buck and restoring the price of the faltering crypto-asset.
It is a self-regulating mechanism that cannot possibly go wrong. It can?
Why did it crash?
In the wake of the downturn, leading crypto market Binance briefly banned all withdrawals from the Terra network and even blocked those trying to sell.
But Luna’s decline was compounded by issues with Terra’s dollar-pegged stablecoin UST.
What is a stable coin?
Stablecoins are cryptocurrencies whose value is usually tied to a physical asset, such as a coin. B. a “real” currency or traded commodities such as precious or industrial metals.
Because they are stabilized by assets that vary outside of the highly flowing cryptocurrency space, they are less volatile than other cryptocurrencies.
Because the price of bitcoin and other cryptocurrencies are closely related, cryptocurrency holders cannot avoid broad price declines without abandoning the market entirely or investing in asset-backed stablecoins instead.
Because a stablecoin’s value is typically tied to a real-world asset, it is unlikely to fall below the value of those underlying physical commodities.
Theoretically, holders of such coins can also redeem their cryptocurrencies for the real equivalent at any time.
However, it’s not always that simple, and some stablecoins like it tether – the largest by market capitalization – have been criticized for failing to provide audits for the reserves of physical assets they claim to be holding.
What is VAT?
Technically, Terra itself is not a stablecoin but is “pegged” to one in UST.
Since UST is tied to the value of the US dollar, its price – and by extension Terra’s – was considered much safer.
UST is a little different from traditional stablecoins. It’s an “algorithmic stablecoin,” meaning it doesn’t hold any physical reserves and instead uses a complicated system of “smart contracts” to keep the value as close to $1 as possible.
However, UST decoupled from the dollar earlier this week, with the once stablecoin’s value falling as low as $0.29.
Things have gotten so bad that many investors feel the UST project will never recover; After the crash, investors attempted to liquidate their positions (in both Terra and Luna) faster than the currency’s automatic stabilizers could step in.
This caused the sophisticated algorithmic mechanism that was supposed to keep Terra trading at a fixed price to fail, rendering both sides of it all but worthless.
Will Terra (LUNA) bounce back?
The Luna Foundation Guard, which acts as a steward for UST, is currently aiming to fund over $1 billion to revitalize the stablecoin.
Do Kwon, who founded Terra creators Terraform Labs, tweeted on Tuesday (May 10): “On the verge of announcing a recovery plan for $UST. Keep doing.”
On Wednesday (May 11) he followed up with a Twitter thread asking the community for patience.
“I understand that the last 72 hours have been extremely tough for all of you,” he said. “Know that I am committed to working with each of you to get through this crisis and we will find our way out of it.
“The Terra ecosystem is one of the most vibrant in the crypto space, with hundreds of passionate teams building category-defining applications within… Terra’s return to form will be a sight to behold.”
But for now, it’s probably best to stop investing in the struggling cryptocurrency.
Terra was seen as a promising step forward in crypto finance, and buoyed by its success, it even used its reserves to acquire a huge stake in Bitcoin.
But if Terra can suffer such a drastic drop in value, what’s stopping other similar coins from doing the same?
Could Tether – the largest stablecoin – follow in their footsteps? And what happens then?