The case of Terra Luna, the fall of one of the world’s largest blockchains

Published in El Pais, 4 June 2022.

The past few weeks have been a difficult one for the blockchain and cryptocurrency industry. Like the stock market, their prices dropped by a significant margin. One cryptocurrency, Terra Luna (Luna for short) experienced a catastrophic event that saw its price go from $119 in February to $0.00009 cents and its partnered stablecoin lose its peg from $1 to 2 cents. People lost thousands of dollars with no hope of seeing their investment returned. So, what exactly happened?

Luna’s big claim to fame was the UST stablecoin, an algorithmic stablecoin that relies on mathematics to claim the token is worth a dollar. It does this by guaranteeing anyone can sell their UST to the foundation for $1 worth of Luna coins. If the price drops below $1 then owners can sell it to the foundation for a profit and the supply would be lowered to bring it back up to $1. Price is $1.01? They will increase the overall supply to lower the price back to $1. As an extra incentive they had a DeFi protocol that offered a whopping 20% interest rate.

The benefit of such a stablecoin is that it allows an organization to run a financial institution without any money in the bank. Essentially if done correctly, it has the power to instantly create a world leading bank with next to zero capital. Unfortunately, one must look at the Luna Foundation to see what happens when it is done incorrectly.

A few weeks ago, the price of UST was 99 cents in what is called “losing its peg” (when a stablecoin is no longer priced at $1) It briefly corrected itself before going to 98 cents. What followed is a panic selling of the token to the Luna foundation which in turn had to mint more Luna tokens to keep up with demand, going from 240 million Lunas in circulation to 7 trillion in less than a week. The price of course plummeted and people who had held both Luna and UST lost everything with no hope of recovery.

The foundation did what they could, stopped the blockchain (which was controversial on its own) and ended up creating a new blockchain and give the cryptocurrency to those who were affected by the crash, but many are skeptical it will work. The South Korean government (where the foundation is based) has opened an investigation as to what happened to the nearly $160 million that evaporated. The lesson here is one should always do their own research when dealing with cryptocurrencies. Even when using coins that are supposed to have a constant value.

About Matthew Glezos 420 Articles
Matthew is Canadian and has a Master in Business Administration. He has international experience in marketing and strategy. He has a strong interest in technology and combines it with the business side.

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