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Here’s what happened to LUNA and why it crashed below $10?

Here’s what happened to LUNA and why it crashed below $10?

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Answer Here’s what happened to LUNA and why it crashed below $10?

A month ago, the Terra crypto project and its ecosystem were at the forefront of the cryptocurrency market.

But everything changed and in just one week, the project’s digital stablecoin UST collapsed, lost its correlation and fell to around $0.30.

Meanwhile, LUNA crashed over 90% in a few days hitting a record low of around $4 (on Binance).

Here is an explanation of what happened with the project that became the topic of the hour in the crypto arena:

How does UST work?

The “Terra” crypto project consists of two main digital currencies:

Earth (UST) and Moon (LUNA).

Read:Nothing new… Bitcoin ETFs Decision Delayed Again

Users can mint UST by burning LUNA coins.

The official documentation of the project provides some examples that make it relatively easy to understand how the algorithm can contribute to keeping the price of UST theoretically stable.

Here, to understand and simplify the topic, we present the following example:

Imagine the entire Terra project economy as two swimming pools (an Olympic swimming pool).

One pool for Terra and one for Luna.

To maintain the price of the Terra, we are adding some Luna pool water to the Terra offer.

Luna can also be obtained in the same way by adding from the Terra Pool.

And it’s all being stimulated by the algorithm.

It should be noted that this is conceptually different from regular stablecoins like USDT or USDC backed by fiat currencies.

Imagine that the price of UST is currently $1.01.

Users can use the swap feature for Terra and exchange $1 of LUNA for 1 UST.

The algorithm will burn 1 dollar of LUNA and advance 1 dollar UST.

Users can then sell 1 UST for $1.01, making a profit of $0.01 in the process.

Read:VanEck and 21Shares Suspend Terra ETPs After Recent LUNA Price Crash

Now imagine the opposite, as UST is trading at $0.99.

Users can do the opposite, i.e. exchange 1 UST for $1 from Luna.

The trade-in burns 1 UST and adds $1 to Luna, so users earn 0.01 UST from the trade.

The greater the difference in the linkage, the greater the profitability of the arbitrage.

In theory, if the link is lost and the UST price collapses below $1, users can burn more UST, convert to LUNA, and sell at a higher profit.

This means that the market value of UST must be less than LUNA because the opposite will mean that operating a virtual Terra bank will not allow some users to be able to redeem 1 dollar of UST for 1 dollar of LUNA.

In the past few days, all the above hypotheses have become a reality.

In an attempt to save the situation, more LUNA was burned and pumped, increasing the number of its coins, which led to the collapse of the price of LUNA as well.

Breakdown of the UST peg and a fall in the price of LUNA by more than 90%:

Over the past few days, a lot of things have happened to Project Terra, causing a series of problems.

Read:Most Chinese banks use blockchain technology…details here

The UST price dropped to $0.225 on May 11, which means that what was supposed to be a stablecoin has lost nearly 80% of its value in a few days.

Which also negatively affected the digital currency LUNA, which fell to around $4 on May 11.

Speculation is rife about an attack on the project, but Terra CEO Do Kwon has yet to offer any official explanation.

The current problem is that as long as the UST is priced below its peg, this creates an arbitrage opportunity for users to burn the UST and mint the LUNA.

Do Kwon has already mentioned that they are working on a recovery plan, but nothing is official at the time of writing.

Read also:

Cardano founder mocks Project Terra after price crashes

Cryptocurrency LUNA crashes below $10 amid catastrophic sell-off


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