The news comes while Terra’s other flagship coin, UST, is trading under $0.40.
LUNA, UST, and the fall of Terra
Terra entered the blockchain business to make smart algorithmic stablecoins.
Stablecoins are often backed by real-world assets. In the case of Tether and Circle, this means cash and bonds, although Tether’s fidelity to keeping adequate cash reserves has been questioned several times.
Stablecoins are supposed to be fungible with their real-world fiat counterparts. If you want a real dollar, you should be able to trade 1 UST for a greenback anywhere and at any time.
Moreover, Terra hoped to solve the transparency issues of other leading stablecoins by foregoing cash reserves and instead creating LUNA. LUNA is the wellspring of value for Terra’s stablecoins, as for every digital dollar in Terra stablecoins, the equivalent is burned in LUNA. The opposite is also true; users could always swap 1 UST for $1 of LUNA and burn that UST.
Over the past 72 hours, though, this mint-burn-mechanism fell apart.