What Happens to LUNA?

On May 11, Blockchain protocol Terra failed to steady its falling crypto LUNA. Panic started to spread across the crypto market overnight. From the chart, we can see that LUNA and its stablecoin, TerraUSD (UST) received extreme losses on that single day, and tumbled 98% over the past 48 hours.

In this article, we will talk about what’s LUNA, why it fell to nil, and how to avoid this for your further portfolio.

What’s LUNA Coin

To learn what LUNA is, we need to know about the concept of Terra. Terra is a blockchain network built with Cosmos, while Cosmos SDK is specializing in stablecoin creation. Instead of using fiat or other crypto coins as reserves, the Terra stablecoin is converted into its native token, LUNA. Therefore, LUNA is the coin that’s a part of the Terra blockchain system.

LUNA empowers Terra users to pay the fees, stake the coins to participate in the blockchain governance, and peg stablecoins like TerraUSD (or UST for short). There is an algorithm while creating a new stablecoin in the Terra blockchain. The algorithm would require you to burn the same value of LUNA to mint UST or other coins. That’s the way how LUNA works.

Meanwhile, the network will burn extra LUNA of more than 1 billion. It would bring it to the equilibrium level.

Why The Price of LUNA Crashed

Unlike Tether’s USDT or Circle’s USDC which are backed by fiat money or equivalent asset, Terra is designed to maintain the peg via mathematical algorithm and active trading. Recently, the UST has “de-pegged” from its value of $1 for a high selling pressure due to the massive drain from Anchor.

Since they are bonded by on-chain mint-and-burn mechanics, that massive short led to sharp drops on both UST and its sister token LUNA. Then the “de-peg” happened. When the traders realize that $1 worth of LUNA was no longer for $1 of UST, they became insolvent. As a result, the LUNA crashed by 98% of its price and lost most of its market cap.

How to Avoid Further Loss

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