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Terra project Why did the price of Luna (LUNA) fall?

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مارس 27, 2023
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In this article, we’ll look at what’s behind one of the biggest failures in cryptocurrency history: Project Terra. When the entire ecosystem behind the Terra project and its UST stablecoin collapsed, the digital currency world experienced a real earthquake; So that for a moment it was feared that this collapse would create a real revolution in the world of cryptocurrencies and especially in the world of stablecoins. In this article, we will discuss the birth of the Terra project, the beginning of its collapse, the prediction of the fall and the attempt to return Terra.


How was the Terra project born?


This project is a blockchain that was created to facilitate global and decentralized payments. To do this, the company behind the project, Terraform Korean Labs, released two stablecoins, UST and KRT, pegged to the US dollar and the Korean won, respectively, thanks to an algorithm based on the LUNA supply.


The Terra project blockchain network immediately became a catalyst for many projects related to decentralized finance, and in less than a year, the price of its main token, LUNA, increased from $1 to $42, entering the fifteen most valuable digital currencies. It became a market.


This token, in the minds of its creators, was created to stabilize the price of the project’s two stablecoins. LUNA holders can also participate and vote on governance proposals on the network through the Proof-of-Stake system.


Should we buy Luna now? Terra Classic (LUNC) price prediction

What is the reason for the price drop of Luna Classic?


On May 9, the main stablecoin, UST, lost its link to the dollar, causing the entire ecosystem to collapse within hours, resulting in a loss of around $60 billion. The price of LUNA quickly fell to zero, while the stablecoin was worth around $0.13 at the end of the day.


It is difficult to understand the exact reasons for such a sudden collapse, even though some warnings about what happened were already given in April. The crash was undoubtedly caused by the UST stablecoin losing its link to the dollar, causing the entire Terra project to fail.


Stablecoins represent a form of compensation for the digital currency market precisely because they are supposed to be backed by fiat currency reserves. This assumption clearly did not exist for UST, which is an algorithmic stablecoin. In fact, the UST relied on a special code to maintain its link with the dollar.


In the six months leading up to the crash, UST was being bought by investors due to its extremely high yield of up to 20%. But this currency later proved to be quite unstable as it acted like a speculative instrument which was the opposite of what stablecoins were created for.

According to some, Terra’s project was too much like a classic Ponzi scheme given that it could not possibly guarantee such a return. Based on the April data, some large investors apparently borrowed Bitcoin to buy UST, and when these large investors decided to exit their positions, the price of the stablecoin began to decline. This caused a snowball effect of the crowdsale that led to the collapse of the stablecoin and the LUNA token.

The opinion of experts before the collapse of the Terra Luna project


In an interview with CNBC, Joy Krug, chief investment officer of Pantera Capital, stated that they sold about 87% of their positions in LUNA and UST from January 2021 to April 2022. Pantera then sold another 8% in May. So it was clear that the Terra project may fall.


Stuti Pandey from Farmer Fund said:


“But they put in place a very loose monetary policy for when we’re dealing with bear markets.”


The collapse of UST has intensified the worries of the financial world. Concerns that have long cast doubt on the resilience of the entire stablecoin system. These concerns start with the largest stablecoin, Tether, whose health in terms of reserves has been questioned many times.


Sam McPherson, MakerDAO engineer and co-founder of software design firm Bellwood Studios, argues that:


” But this same force works the opposite way in bear markets and reveals their fundamental flaws. So this is what ultimately caused the downfall of the Terra project.”


To make matters worse in the past few days, news broke that Terraform Labs allegedly laundered $4.8 million through a Korean subsidiary that some claim is a paper company.

Trying to survive


Luna 2.0 price chart – photo from coingecko website


Many Terra supporters are currently trying to revive a new project called Terra 2.0 with a new token that is also listed on Binance. The value of this new digital currency, which was released on May 28 at a price of $29, dropped to $7 within minutes and then stabilized around $6. This is a tangible sign that trust in the Terra name is now seriously in question.


What many experts are now predicting is likely to be a new crackdown on cryptocurrency regulation to prevent similar incidents from happening again. In addition, Senator EliZabet Warren has told the Senate Treasury Committee the need for strict regulation of stablecoin markets, describing it as the “lifeblood” of the dangerous DeFi market.