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What Is Luna Cryptocurrency And Terra Infrastructure And Why Did They Face A Sharp Fall?

What Is Luna Cryptocurrency And Terra Infrastructure And Why Did They Face A Sharp Fall?

The Tragic Event That Happened To The Luna Digital Currency Gave The Investors Of This Digital Currency A Big Shock And Caused Them A Heavy Loss. 

For example, let’s say you bought $100 worth of Luna cryptocurrency, and now you need to sell it for just a few dollars.

Few experts predicted that the cryptocurrency, which had managed to climb to 8th place in terms of total market value, would face a price drop of nearly 100% in just a few days, and its value would drop from $119 to $0.0004.

This sharp and sudden fall reminds us that the digital currency market is unstable, and we may always face the risk of capital loss.

But what was the reason for this cryptocurrency’s sharp drop in value? In this article, we will briefly examine the reasons for this sharp drop and the developers’ efforts to revive this cryptocurrency in the form of Luna 2.

What is Terra’s infrastructure?

Terra is an innovative contract-based blockchain that uses the CosmWasm technology of the Cosmos projectThe blockchain of Terra digital currency was created by a Korean company called Terraform Labs, a subsidiary of Terra Alliance Group. This holding includes 15 companies active in the field of e-commerce in Southeast Asia. Transform Labs was founded in 2018 by Daniel Shin and Du Quan, who has a lot of experience in economics and e-commerce. Mr. Shin is a graduate of the Wharton School of Economics and, to date, has founded successful companies such as Chai (mobile payment app), Tman (e-commerce platform), and Fast Track Ija (startup growth center).

In April 2019, the leading network of the Terra protocol ( Terra) launched the TerraKRW token with the symbol KRWT for the first time. At the initial sale ceremony, Terra Network’s Luna digital currency was made available privately to investors and significant exchanges such as Binance, Huobi, and OKEx. So that obtained about 32 million dollars of capital in this way. 10% of this amount was allocated to the development of Transform Labs and 20% to the employees and participants of the project development.

 In addition, another 20% was reserved for the maintenance of cryptocurrency stability, 26% for project supporters, and 4% as a strategic reserve.

Terra‘s blockchain has become an attractive infrastructure for blockchain-based applications due to the support of Terra LUNA and Terra USD UST currencies. Terra implemented a comprehensive payment solution using user-friendly tools so that businesses can use blockchain technology to accept and automate Terra payments without intermediaries. In addition, Terra used a dual currency system to help users take advantage of arbitrage opportunities.

The above approach has contributed significantly to the growth and acceptance of the Terra network and Terra digital currency called Luna. It is necessary to explain that the Terra blockchain has played a vital role in developing several successful cryptocurrency projects, such as Mirror Protocol and Anchor Protocol. The success of the two mentioned projects played an influential role in the rapid growth of Luna’s digital currency. It is good to know that the Terra digital currency protocol has many collaborations with companies active in the field of digital currency and has provided an innovative and decentralized solution for developing multi-collateralized stablecoins.

Blockchain and Terra protocol and Luna digital currency worked based on what model?

The Cosmas Development Kit allows developers to develop interactive blockchain applications ideally and quickly. The Terra blockchain was created through the Cosmos software development kit and uses the Tendermint proof-of-stake consensus mechanism. This issue made Terra network able to have 100 verifiers. As a result, Terra’s digital currency network structure had a more centralized proof-of-stake than other blockchains.

Completed Blockchain transactions in just a few seconds and the cost of transactions interacting with intelligent contracts was lower than the Ethereum network’s gas fee (GAS). Therefore, the Terra protocol was considered an attractive option for that group of developers looking for blockchains supporting intelligent contracts.

TerraUSD is a stablecoin based on the Terra digital currency blockchain, known by the symbol UST. After the successful release and acceptance of the Terra protocol, the issuance of UST tokens began in September 2020. The distinguishing feature of this successful stablecoin from similar examples was that the UST structure is not technically centralized.

The dollar value of the tera was determined and changed based on supply and demand.

When UST prices were above $1, holders of Luna currency could exchange their balances for these stablecoins. Also, it was possible to exchange Luna currency with Tera dollars, which allowed investors to use the arbitrage opportunity. When this happens, new UST coins will be issued, and this process will continue until the value of TerraUSD reaches $1.

Did It intend to keep the tera dollar value equal to 1 dollar? Typically, an increase in the UST balance was accompanied by an upward trend in the price of the Luna cryptocurrency, as when the Tera dollar balance decreased, it was possible to exchange USTs that were worth less than $1 with Luna for a profit. During this process, some of the Lunatransferred tokens were burned to make the currency rarer and more valuable, and other Luna tokens were also to the Community Pool. On the other hand, by simplifying the possibility of spending tera dollars, the price of this stablecoin remains above 1 dollar. This was one of the reasons why investors considered UST and Luna digital currency safe investment mechanisms.

This trend continued, and even in recent months, the circulating dollar balance of the Terra digital currency network increased, which made UST the fifth largest stablecoin in the market in terms of transaction volume. More precisely, the demand for TerraUSD has increased, which has made experts predict a bright future for the project.

Luna digital currency

Luna is the native digital currency and a vital component of the Terra network (the same rule applies to Luna 2). By burning this token, the developers of this cryptocurrency helped the stability of the Terra ecosystem and allowed users to buy and sell this cryptocurrency without any problems.

Holders of the Luna currency could vote on proposals that would change various aspects of the Terra protocol, thereby participating in the network’s governance process. In addition, I used the inventory collected in Terra‘s user community pool to develop decentralized UST applications. The issuance of UST required by these programs was also done through Seigniorage.

A sudden and severe fall in the value of Luna

Luna digital currency and stablecoin UST faced a heavy fall nearly a month ago in May 1401. This issue led to various rumors. Some believed it was a whale’s leg and others described this digital currency as a big scam.

The stablecoin TerraUSD (UST) symbol UST and it is backing digital currency Luna (LUNA) experienced a sharp drop in just two days. The UST stablecoin began its downtrend on May 9, and two days later, it lost 73% of its value to the $1 range before trading at $0.27. Another cryptocurrency of the Terra ecosystem, Luna, also experienced a 91% drop during this period, and its value reached $5.6 from $67. The downtrend continued until TerraUSD, which was supposed to be in the $1 range, earned $0.17, and Luna, which was once valued at $119, fell to $0.0004. The sharp drop in the value of USD and Luna caused some users and experts to describe the project as a scam or a Ponzi scheme.

UST token, an algorithmic stablecoin, was kept close to $1 using a series of Mint & Burn operations in a decentralized blockchain format by Luna currency.

The developers tried to make this digital currency attractive to investors by keeping the price of the Luna token variable to prevent the value of UST from falling, and more investors would be willing to buy this digital currency. In theory, this mechanism works, so traders can always swap $1 Tera UST for $1 Luna. However, as we mentioned, the one-dollar UST token lost its value and reached $0.985, but a day later, the developers were able to compensate for this price drop. Still, the next day, the sharp decline in the value of this stablecoin started again.

The sharp decline in the value of Terra (Luna) meant that there was no sufficient support in this ecosystem to support the weight of this algorithmic stablecoin and the inability to redeem every $1 of Luna with $1 of UST, which exposed the infrastructure to the risk of instability in the price of UST.

What factor prevented the drop and increase in the price of stablecoin UST of Terra network?

Luna Foundation Guard, the decentralized organization, tasked with maintaining the $1 value of the UST stablecoin, announced shortly after this that it would release $1.5 billion of its bitcoin reserves to market makers to bring the UST price back to $1. (the people who were responsible for the line and handling of this infrastructure) the professional of this infrastructure has given a loan. At the same time, Jose Maria Macedo, a member of the LFG community who managed the Terra Foundation’s treasury, tweeted that the drop in Luna‘s price was not a concern. Subsequently, the Terra ecosystem released $1.5 billion in bitcoins to prevent Luna’s cryptocurrency from falling in value, which did not work.

A stablecoin is a digital currency with a fixed price. Of course, this stability depends on another asset. Generally, valid digital currencies of the cryptocurrency market have a fixed fee of 1 USD. Unfortunately, Terra USD lost its price balance with the US dollar, dragging Luna’s digital currency down. What some experts say may happen again for another cryptocurrency called Tether, which has the same price as the dollar.

Why did the value of Luna and UST cryptocurrency fall?

The severe decline in the value of Luna and UST first started with the heavy selling of the big financiers of this infrastructure, called whales. Then the falling trend became more intense with the fear and increased selling pressure by retail investors. Luna’s value gradually decreased and lost its patronage until it finally collapsed. In the meantime, small investors, hoping to increase the price and take advantage of the fluctuation, spent their capital on buying Luna and lost again, and at the same time, big investors continued to sell. Interestingly, Do Quan and the Luna Foundation also failed to maintain the value of the prices and spent all their Bitcoin reserves to no avail.

Luna and UST digital currency were part of the dual token structure of the Terra protocol. In this ecosystem, you need to burn Luna to make UST and burn UST to redeem and rebuild Luna. When stablecoin UST lost its stable price of $1 on May 19, redemptions of this token created severe inflation that eventually led to a 99% drop in prices. So that the cost of the Luna token, which reached 100 dollars in April, reached the level of 0.003385 dollars in just a few days and was traded at the price of 0.00174 dollars.

What fate awaits Luna digital currency and blockchain (Terra)?

Now we come to the critical question after the above events, what is the future of the price of Terra Luna and Stablecoin UST? The sharp drop in the price of Luna and stablecoin UST caused a lot of loss to investors and negatively affected the world of digital currencies. Now investors are asking if there is a way to compensate for this strange price drop.

Some time after the dollar value of Terra (UST) dropped to 0.094, and Luna digital currency fell by 99.99%, Du Quan, the founder of the Terra network, presented a proposal for this blockchain that did not attract much attention from investors. This issue made him change his plan and make another proposal to build a new chain, remove stablecoin UST, multiply 1 billion Luna tokens and distribute them among network investors, which was not very helpful.

In the initial reviews, most users of the Terra blockchain opposed the said plan, but after putting the project to the vote, 78% of investors voted for it. Unfortunately, at the time of the vote, Du Quan changed his proposal, fraud in the world of blockchain and digital currencies. This issue caused the users to request that Do Kwan vote on his proposed plan once more to ensure that there is no specific problem.

With the approval of the 1623 governance proposal of the Terra network, the new Terra 2 blockchain was launched in early June, or more precisely, June 7, 1401. The newly minted Luna 2 tokens that can be bought and sold in the new network with the LUNA symbol (it should be explained that LunaThe initial (which has fallen sharply in value, now renamed LUNC) was among the former investors of the blockchain.

The strange thing that happened was that only three hours after the release of this token, its price dropped by nearly 70% and reached $3.4, but a day later, its value reached $5.

The DigitalCoin website predicts the future of Terra Luna (Tera Classic) so that the value of this digital currency will not increase significantly. Analysts and experts of the above site believe that the cryptocurrency value of the Terra project will be $0.00051455 in 2025 and $0.003 in 2030 (Figure 1). Based on historical data, Luna’s price is estimated to reach $0.00016938 in 2022, $0.00024373 in 2023, and $0.00036106 in 2024.

figure 1

The Price Prediction site, which predicts the future of digital currencies based on deep learning calculations, believes that the value of this token will reach $0.055 by 2025 and $0.38 by 2030 based on technical analysis.

last word

Various events, such as the heavy sale of a UST whale, caused the price of this cryptocurrency to fall below $1. Further, considering that Luna is an algorithmically stable cryptocurrency, bots of the Terra network started burning UST (to reduce the supply) and building Luna. This trend continued until Luna reached the range of 7 trillion numbers, which is standard with a terrible increase in the collection of an asset; its price will decrease drastically (the same old principle of supply and demand in the financial world).

Luna currency‘s terrible volatility taught investors some big lessons.

  •  Don’t put all your eggs in one basket.
  •  When the value of a digital currency reaches its highest ceiling based on the historical background of that cryptocurrency, be ready to trade, and don’t forget that cryptocurrencies are facing the risk of a sharp fall at any moment.
  •  When buying digital currency, always follow the market fluctuations unless you have purchased a well-known cryptocurrency and decide to use methods like profit cultivation.