The Terra cryptocurrency Terra (LUNA) was launched in 2019, but it turned out to be on everyone’s lips in late 2021 — early 2022.
In just a year, the value of the altcoin has increased by more than 5500%. If in January 2021 LUNA cost about $1.5, then by January 2022 it had risen in price to $85.
In April 2022, the altcoin exchange rate reached its all-time high of $116. In just a couple of months, the coin collapsed. According to Glassnode, the collapse of the stablecoin UST and the fall of LUNA in May caused a wave of $28 billion in losses during the month.
In our material, we decided to figure out how LUNA works, what is the reason for its popularity lately, and what led to its recent collapse.
What is the Terra cryptocurrency (LUNA)
LUNA was invented by the South Korean company Terraform Labs. The company was founded in 2018 by entrepreneurs Daniel Sin and Do Kwon.
Xing previously worked on Ticket Monster, a South Korean online ticket booking service valued at $1.7 billion.
LUNA is a native token of the Terra blockchain, which is based on an algorithmic stablecoin (that is, a stablecoin that regulates its supply on the market using an algorithm). The creators conceived Terra not just as another blockchain, but as a full-fledged financial and technological system with an eye on business.
Back in 2018, TechCrunch described the project as “AliPay on the blockchain.” Chinese AliPay is one of the largest payment systems in the world, part of the Alibaba Group.
Terrafrom Labs said that Terra should become another way for companies to make payments along with the usual Visa, Mastercard and others.
The creators of Terra chose stablecoins for a reason. Cryptocurrencies are known for their volatility, and therefore are not suitable for paying for goods and services. Stablecoins, on the other hand, are pegged to fiat currency, which means that their exchange rate is, by definition, more stable. True, some believe that algorithmic stablecoins are subject to volatility much more than ordinary ones.
To develop the project, the company enlisted the support of several dozen companies that formed the Terra Alliance. Members of the “alliance” must promote the use of Terra through their services.
Last December, Terra became the second largest smart contract platform after Ethereum.
How LUNA cryptocurrency works
It is important to clearly distinguish between the Terra stablecoin and the LUNA cryptocurrency.
LUNA, among other things, is needed in order to maintain a “balance” in the Terra blockchain. To be more precise, LUNA maintains the price of Terra stablecoins at the required level.
There are several stablecoins on the blockchain, pegged to several currencies: the euro, the dollar, the Japanese yen, and even the Mongolian tugrik. Depending on the currency to which the stablecoin is pegged, it can be called TerraUSD, TerraEUR, and so on.
It works like this: when the volume of transactions among all participants in the Terra network increases, the demand for Terra stablecoins increases. In this case, the blockchain releases new LUNA coins to keep the stablecoins stable.
Accordingly, in the opposite situation — when the volume of transactions falls — Terra “withdraws” the excess LUNA back and “burns” it.
The emission of LUNA is dynamically limited to one billion coins — that is, if at some point this amount is exceeded, then the excess will “burn out” automatically.
By the way, Terra and LUNA have such names for a reason. As conceived by the developers, they symbolize the relationship between the Earth and the Moon, which provides “gravitational stability.”
Other ways to use LUNA
LUNA is needed not only to maintain the balance of the entire Terra system, but also to make purchases on the blockchain. To buy something, the user needs to purchase the Terra stablecoin. To do this, you will need to “burn” a certain amount of Luna coins, get your stablecoin for it, and then pay for the purchase in one of the applications running on the blockchain.
Since the Terra blockchain runs on the Proof of Stake algorithm, LUNA holders can use coins for staking. The network uses these coins to confirm transactions.
Through staking, investors also receive rewards (part of the cost of transaction fees) and can participate in decisions regarding the Terra ecosystem through voting.
For staking, you can use the Terra Station wallet. Through Terra Station, you can also access decentralized applications that run on the Terra blockchain.
Reasons for the growth of the LUNA cryptocurrency
The reasons for the sharp increase in the LUNA rate until May 2022 are called several factors.
One of them is that investors are looking for an alternative to the Ethereum blockchain, which still runs on the outdated Proof of Work algorithm (switching to Proof of Stake is still only promised) and is characterized by slow transaction processing, as well as high commissions for transactions.
For the same reason, Solana, which many call the “killer” of Ethereum, fired. Another similar example is Avalanche.
Another reason for the popularity of LUNA is the growing popularity of stablecoins in the world. As we have already noted, unlike other cryptocurrencies, stablecoins are much less volatile, and therefore more promising as a means of payment than bitcoin, ether, and others.
The fact that LUNA is directly linked to the Terra stablecoin may also push the price of the altcoin higher.
Also, news about the development of the project can also affect the rate of the altcoin. So, in a week in late February — early March, LUNA went up by 80% at once, when it became known about the integration of Terra and the THORChain protocol.
It is worth noting that in the US, Terra has a legal battle with the Securities and Exchange Commission (SEC). The SEC believes that blockchain developers illegally sold securities to investors. This is the same claim that the regulator makes to the creators of Ripple.
The collapse of the LUNA cryptocurrency
On Monday, May 9, the algorithmic stablecoin of the Terra ecosystem — TerraUSD (UST) — lost its peg to the US dollar (the most important characteristic for any stablecoin). The LUNA cryptocurrency used to issue it collapsed by more than 95% and is still in free fall.
LUNA became the first coin in history to enter the top 10 cryptocurrencies and then depreciate by 95%. Investors are actively withdrawing funds from this Terra blockchain token due to the collapse of the main ecosystem model.
Terra called its goal the creation of a bridge between traditional finance and cryptocurrencies. To do this, the project has launched several stablecoins, including USD-pegged UST. The algorithm of interaction between UST and LUNA, the internal coin of the system with a floating rate, is responsible for the 1: 1 rate compliance. Because of this, UST is called an algorithmic, or decentralized, stablecoin.
The fall of the UST token at the beginning of May 2022
All the reasons for the fall of the UST token below $1 in early May 2022 are still not clear. But its subsequent fall exposed a vulnerability that led to the collapse of a number of previous algorithmic stablecoins: the value of UST depends on users’ confidence in the value of the Luna token, and the value of Luna is ultimately based on the confidence that the price of UST will remain stable.
One of the initial reasons for the decline in UST to $0.98 and below was the sell-off in the cryptocurrency markets, in turn caused by the collapse of the US stock markets.
The TerraUSD peg breach began last weekend following a series of large TerraUSD withdrawals from the Anchor Protocol, a kind of decentralized bank for crypto investors.
Anchor Protocol is built on the technology of the same Terra blockchain network on which TerraUSD is based. It has become one of the main growth drivers for the stablecoin in recent months, as it guaranteed crypto investors a 20% annual return on UST staking.
At the same time, TerraUSD has also been traded for other traditional asset-backed stablecoins through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges. The sudden outflow of money scared some traders who started selling TerraUSD and the Luna token.
Before the peg break, TerraUSD was the third largest stablecoin with a total market capitalization of $18 billion.
The creators of UST created a reserve of bitcoin and another cryptocurrency called Avalanche and promised that they would eventually buy up to $10 billion worth of bitcoin to use to support the value of UST.
Do Kwon, the currency’s top advocate, has updated the plan to keep the UST peg alive, allowing more LUNA tokens to be created so that the market can absorb all the UST that comes out. But there will be a “high price” to pay for this, he wrote on May 11. Theoretically, the price of LUNA will fall even more, as an increase in supply will dilute the value of individual tokens.
According to CoinDesk columnist David Morris, “The Terra/Luna ‘experiment’ is almost certainly over. The chances of the system stabilizing and TerraUSD recovering its peg naturally are close to zero as the whole structure was based on external injections. These investors may have finally come to their senses.”
Following TerraUSD, the largest stablecoin in the world, Tether (USDT), “detachted” from the US dollar. USDT fell to a low of $0.9514 on May 12.
Paolo Ardoino, Tether’s chief technology officer, said the same day that the cryptocurrency is ready to “maintain its peg to the US dollar at all costs.” He added that Tether owns a “ton” of US government bonds and is willing to sell them to protect the token.
LUNA cryptocurrency exchange rate forecast
It is almost impossible to give an accurate forecast, especially a long-term one, at the rate of any cryptocurrency, given the volatility of the crypto markets. But some still try.
The Wallet Investor publication has an extremely optimistic view on the future of this cryptocurrency — according to the forecasters, in a year LUNA will cost about $151.
A more cautious forecast for DigitalCoinPrice. They assume that the maximum altcoin rate in 2022 will be $0.00004, in 2023 — $0.000045, and in 2024 — $0.0000462.
Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice — it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.