Luna Crypto Crash: What Happened To Terra Luna?

Credit: Unsplash June 15, 2022: Updated to reflect the current stats related to the Luna/UST crypto crash

The Luna crypto crash of early May saw the Terra Luna crypto plummeting to an all-new low, crashing hard in terms of pricing, with its stablecoin, TerraUSD (UST) losing its peg.

At the time of publication, the Luna Classic price has fallen 6.9% and currently sits at $0.00005775. At the same time, UST is down 14% at $0.00005731 in the last 24 hours. With this crash has come some Luna delistings, too.

So, while a Luna recovery plan is now ongoing via Luna 2.0, what caused the Luna and TerraUSD prices to first plummet?

What Happened To Terra Luna?

The Luna crypto crash comes from its link to TerraUSD (UST), the algorithmic stablecoin of the Terra ecosystem.

UST is an algorithmic stablecoin and is operated via computer codes that help maintain its price equilibrium. The process involves burning or minting LUNA/UST to maintain the price of these tokens.

When a UST is minted, $1 of Luna is burned, while this also happens the other way around for Luna minting and UST burning. As UST threatens to go below its peg, holders will sell their UST (or burn it) for $1 of Luna, making a slight profit. This is until UST rises above $1, when the opposite encouragement happens.

After a large amount of UST was dumped, the stablecoin started to depeg. More UST was sold in a mass panic, minting more Luna and increasing the Luna circulating supply. This had the knock-on effect of then crashing the price of Luna.

This circulating supply inflation has drastically increased since the crash. Previously, the circulating supply sat at around 345 million Luna. On May 12, it was 3.47 billion Luna, according to analytics data. As of May 13, it was now 6.5 trillion Luna, where it remained ever since. Luna burns attemped to reduce this circulating supply.

The Luna Foundation Guard (LFG) had been purchasing Bitcoin to save UST from depegging. However, the practice did not work amidst the gradual crypto meltdown.

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Luna Crypto Crash: The Aftermath

Following the crash, several crypto exchanges such as Binance delisted Luna and UST pairings. Trading suspensions were also prevalent in the lead-up to the weekend. A Luna Coinbase listing, previously set for launch by the end of June, has also quietly been pulled.

Luna's Do Kwon published a recovery plan for Luna, which seemed to have a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below the $1 mark once again. It has since plummeted below 1 cent.

Dropping to new lows, Luna has now been abandoned, with Terra launching a new chain and new coin - Luna 2.0. The recovery chances remain up-for-debate, with the Luna 2.0 price remaining volatile.

Meanwhile, Luna Classic remains as the old chain and old coin. Meanwhile, there's also talk of a UST 2.0, too.

The next step for Luna will be to regain its original market cap, but this still seems quite far off, given its market cap is now $1.5 billion.

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Luna Crash's Impact On Crypto Market

The Terra Luna crypto crash seems to be both a symptom and instigator of some of these major cryptocurrency price drops.

After the Luna Foundation Guard and Do Kwon purchased around $3 billion worth of BTC, the success of the Terra ecosystem became more linked to the wider cryptocurrency market through Bitcoin.

With the LFG and other market makers having to sell these Bitcoin reserves in an attempt to stop the UST depegging, this had a ripple effect on the wider market, seeing Bitcoin drop below the $30,000 mark. LFG revealed it sold over 80,000 Bitcoin in an effort to do so.

Aside from the impact on crypto prices, it has led to further scepticism about stablecoins, particularly algo-stablecoins. The Shiba Inu stablecoin SHI may be forced to rethink its plans following the UST depegging.

However, the crypto market now appears to be bouncing back, with Bitcoin returning to the $30,000 price and Ethereum returning above $2000. Nevertheless, the cryptocurrency community remains shaken by the collapse of UST and Luna, adding to an already uncertain period.

Following Luna's massive crypto crash, the Justin Tron backed USDD has also lost its peg to the US dollar. The fall of LUNA and UST is now being compared to the latest USDD depeg.

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