In what will surely be a historic week in stablecoin history, Terra’s LUNA, the currency that backs its dollar-pegged stablecoin UST, has slid beneath a dollar at the time of writing.
No, we haven’t got our wires crossed. Terra’s LUNA – the formerly market-leading digital currency that was worth just over $119 in April – is trading at $0.85 at the time of writing.
It’s no ordinary crash, either. It’s in freefall.
Earlier today, LUNA lost 32% of its value in the space of an hour.
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.
UST began its tailspin over the weekend, leading to LUNA plummeting an initial 10%.
On Tuesday, a $1.5 billion loan from a Terra-centric non-profit organization called the Luna Foundation Guard (LFG) failed to buoy the stablecoin, which has since bottomed out at $0.30 this morning.
The event has been a catastrophic chapter in crypto history, and one that hasn't missed regulators either.
U.S. Treasury Secretary Janet Yellen pointed to Terra’s collapse as an example of crypto’s risks and another reason why we need stablecoin regulation this year.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.