It is a very powerful and very brutal process that the cryptocurrency market has invited us to in the last three days. Alongside Bitcoin and Ethereum, each down more than 20%, the impossible happened to stablecoin TerraUSD (UST), which fell off its dollar track Monday night.
As a result of this unprecedented episode, the price of Luna, a top 10 cryptocurrency in the world, fell from $80 earlier in the month to less than $0.18 this morning (5/12/22 at 11:45 AM). The losses are almost complete for investors who bought the crypto in the past few months. Luna ranks 63rd among cryptocurrencies in terms of capitalization and is dangerously close to zero dollars. One of the biggest cryptocurrency crashes to date.
Last night saw a final bounce that caused Luna’s price to rise by over 400%. But this didn’t last long and the groundless speculation soon died down. The Luna Foundation, behind the Terra blockchain and its various tokens, had sent a bottle overboard and asked investors to help it recapitalize its tokens. A lifeline that wasn’t enough. The Height of the Unthinkable: The UST stablecoin now costs more than the Luna token.
Why such a drop?
To understand Luna’s case, we must understand that of UST. As we noted in an article about its case published Tuesday, it is an algorithmic stablecoin that does not rely on a reserve of the fiat currency it runs on being placed in a bank. The TerraUSD is based on an arbitration mechanism that works on the Luna cryptocurrency (from the same Terra blockchain). Simply put, if the price of a UST falls below one dollar, the exchange mechanism will burn one UST for one Luna dollar.
As a result, Luna’s price came under bearish pressure, and the sudden arrival of exceptional volume set the mechanism spinning. The cryptocurrency went into a spiral where investors withdrew en masse (we’re talking about $40 billion that evaporated) and where the price continued to fall without any support or psychological threshold. Conversely, investors are also withdrawing from the UST – which had lost what made it stand out: the stability of its price.
What caused the crash is going to be a very big deal. We’ll try to come back to that citrus press as soon as possible. But one thing is certain, with thousands of people around the world in debt, some have certainly made billions of dollars. Do Kwon, the developer behind the Terra blockchain (who claimed to want to “kill” rival stablecoins like DAI), may be under investigation.
consequences in France
Over the past few months, UST has climbed the rankings of the most popular stablecoins, sitting in third place up until this week. In particular, its success can be attributed to staking platforms like Anchor (52% of UST reserves), which are based on the Terra blockchain. This would allow investors to deposit a sum of their stablecoins at 19.5% interest on an investment. Enough to promise risk-free passive income… assuming the stablecoin doesn’t fall in value.
In France, French investment service JustMining posted a message on Twitter yesterday to issue the warning. For its clients who would have decided to use its lending offering to receive income from their stablecoins, it will be necessary to act quickly as 40% of the product is linked to the UST.
The failure of the stablecoin UST has a serious impact on our credit product.
We invite our customers to read this article carefully: https://t.co/r7MdBhirud
We will get back to you quickly with new information.
— JustMining (@JustMiningFr) May 11, 2022
“For example, a client with a UST of $0.52 (05/11/22 at 4:30 p.m.) and exposure to 39.58% of the lending will confirm a loss of 18.98% on their position.”explained the company, which has developed its lending service using several specialized platforms, including … Anchor. “No matter what stablecoin you invest in on our platform, your capital will be divided into different stablecoins”including VAT.
There is no reason to hope for a return to normality in the prices of Terra’s two digital assets. The only hope would be for the Luna Foundation, the origin of the tokens, to find multi-billion dollar investors to recapitalize their tokens. But investor confidence is certainly lost. And no financial analysis can contradict that.