Will Terra Luna be able to return to full health?
Stablecoins may be a good investment for those who want to hedge against the volatility of cryptocurrencies.
On Twitter, Terra founder Do Kwon pleaded with the cryptocurrency community to exercise patience.In less than 24 hours, the value of Terra (LUNA) fell by more than 98 percent, causing fear among investors.
When Terra was at its peak of $120 (£98.60) last month, it was one of the top 10 most valued digital currencies.
From approximately $40 billion (£32.9 billion) to about $500 million (£411m), the company suffered catastrophic losses as a result of the rapid meltdown.
So why has its value plummeted so significantly, and will it ever return to pre-crisis levels?
You can find out all you need to know about it right here!
LUNA stands for what?
Terra is a cryptocurrency based in South Korea.
On CoinMarketCap, Terra is described as “a price-stable cryptocurrency aiming at widespread adoption” in South Korea by Daniel Shin and Do Kwon, who formed Terraform Labs in January 2018.
A Medium article explains that the company’s goal is to relieve customers from the extra costs associated with sending money overseas on a regular basis. Using blockchain technology, they want to eliminate inefficiencies while also providing stability and adoption by e-commerce platforms.
There are two parts to this coin: the’stablecoin’ Terra, and Luna, which is a more ‘conventional’ type of cryptocoin.
Luna’s price fluctuates with the market, but one Terra will always be worth $1 in real-world money, and one Terra will always be worth $1 in real-world money.
In other words, if Terra trades for more than $1, traders can buy $1 worth of Luna and exchange it for a Terra that trades for more than a dollar = profit.
Buying Terra for less than a dollar and exchanging it for Luna equals profit if Terra is trading below a dollar.
So, if a crypto asset loses value, investors may simply trade their holdings for the other half, reaping a quick profit and reinvigorating the value of the flailing cryptocurrency asset.
It’s a self-correcting device that can’t go wrong. Is it possible that this is the case?
What’s going on here?
With bitcoin down more than 50% from its all-time high of around $69,000 (£56,677) in November 2021, the Terra crisis comes at a bad moment for the crypto sector.
While Binance temporarily halted all Terra network withdrawals, even those who intended to sell were prevented from doing so, in the wake of the fall.
But Terra’s UST, the dollar-pegged stablecoin, has caused the collapse of Luna.
What is a “stablecoin” and how does it work?
These are cryptocurrencies whose value is usually linked to a physical item, either a “real world” currency or traded commodities like precious metals or industrial metals. Stablecoin
They are supposed to be less volatile than other cryptocurrencies since they are stabilised by assets that are not in the volatile cryptocurrency market.
Cryptocurrency holders can’t escape price decreases unless they leave the market or invest in stablecoins that are backed by real assets.
There’s little chance that the value of a stablecoin will fall below that of the underlying physical commodities because of this.
Theoretically, those who own such coins might sell them at any time for the real-world equivalent.
A few stablecoins have attracted criticism for not being able to produce audits for their physical asset reserves, such as Tether, the largest stablecoin by market capitalization.
What does UST stand for?
Terra is not a stablecoin in and of itself, but it is “pegged” to one in UST.
Terra’s value was supposed to be more stable because UST’s price was linked to the US dollar’s value.
Stablecoins like UST are a little different from the norm. Rather than relying on real reserves, it uses a complex system of “smart contracts” to keep its value as close to $1 as possible, making it a “algorithmic stablecoin”.
It was just this week, though, that the once-value stablecoin’s dropped to as low as $0.29.
Many investors now believe that the UST project will never recover; following the currency’s meltdown, investors rushed to liquidate their stakes in both Terra and Luna.
An mathematical process that was designed to keep Terra at a constant price failed, making both sides of it nearly useless.