Whew. A lot of action in the crypto market today. Most of it can attributed to Terra’s UST de-pegging from the US dollar, and LUNA crashing. Crypto Twitter is effectively calling this “crypto carnage”. Everyone is calling for lower lows, and trying to time the bottom. Days like today are no surprise for anyone who have been around for a while.
The crypto market as a whole fell about 10% with Bitcoin falling ~ 8% and Ether dropping ~ 5%. Bitcoin broke below $30K and asset prices continue to fall at the time of this writing. The macro backdrop hasn’t loosened up either, this “carnage” may not be over.
What is Luna & UST?
Most of the attention today has been on Terra, a blockchain protocol containing a variety of algorithmic stablecoins that is built on Cosmos.
It provides the user the ability to instantaneously trade, save, exchange Terra stablecoins. Terra aims to “bring DeFi to the masses”. It runs on a Proof of Stake blockchain, so miners have to stake LUNA to mine new transactions.
TerraUSD (UST) and LUNA are the two primary native tokens.
LUNA is primarily used for both governance and mining. It acts as the reserve asset of the terra platform and has 3 fundamental purposes:
1) mine Terra transactions through staking 2) price stability of Terra stablecoins and 3) an incentive for blockchain validators.
What Happened Today?
Recently Terra Co-Founder Do Kwon announced he would begin purchasing Bitcoin to back UST. His plan was to continuously buy BTC to back new mints of UST. Do Kwon said he was aiming to become the largest holder of BTC.
” I’ve already donated money so that we can build up these reserves on behalf of the community and we plan to be doing this in perpetuity, so the $3 billion or so that we‘re buying initially to bootstrap the reserves is going to be followed up by persistent buys of Bitcoin through UST seniorage […] every time UST is minted, there will be new bitcoin that is added to the reserves….The easy way to understand this is that we‘re using Bitcoin to create a decentralized Forex reserve for the Terra stablecoin,”Do Kwon
UST was working with LUNA to maintain a price of $1.00, attempting to allow users to have the ability to always swap UST for LUNA for an equivalent exchange. Until today. UST lost it’s peg to the dollar and went as low as $0.65 today.
This is the second time in 3 days that UST lost it’s peg. Over the weekend UST dropped to $0.985 before recovering. Right now, at the time of this writing, it sits at $0.75! The de-pegging came after the LFG, Luna Foundation Guard, announced that $1.5 Billion in BTC reserves would be loaned out to large market makers to rescue the $1.00 peg.
Consequently, the UST de-pegging wrecked the value of LUNA dramatically effecting the price. LUNA’s price dropped more than 50% to it’s daily low of $28.68, currently at the time of writing it sits at $35.22. The value of the asset dropped so far that UST now has a higher market cap than LUNA. All of this caused hysteria across the markets as the crypto market was “bleeding red” today.
Investors panicked and all attempted to exit the Terra ecosystem seemingly all at once. Anchor protocol, the most popular staking protocol on Luna, and some exchanges became congested with orders today. Many exchanged were under pressure from the rush of people trying to exit the protocol.
TerraUST lost it’s peg to the dollar, and Do Kwon deployed BTC reserves to save the UST peg to the USD. The already existing macro environment didn’t help with any of the bleeding today and investors panicked. The bear markets can be vicious but this isn’t unfamiliar for crypto. Stay the course and play the long game.