Key facts:
While USDT or USDC are backed by fiat money, Terra is anchored to the dollar through an algorithm.
The sell-off led to sharp declines for UST and its sister token LUNA causing the “disconnect”.
The past week has been a dark period in the history of cryptocurrencies. The total market capitalization of this industry fell to $1.2 trillion for the first time since July 2021. On or about May 4, Terra (MOON) ranked among the top 10 most valuable cryptocurrencies in the market, with a single token quoting at a price of USD 85 and the all-time high at the price of USD 119.5. However, by May 11, the price of the asset had dropped to $15. And, 48 hours later, the token has lost 99.98% of its value, currently trading at a price of $0.00003465.
The turmoil caused by Luna, in large part, has been due to the real-time disintegration of Terra, a Cosmos-based protocol that powers a set of algorithmic stablecoins. In parallel, the fall of Terra calls into question the real-world utility and long-term viability of algorithmic stablecoins.
Inherent Characteristics of Algorithmic Stablecoins Contributed to Decline
Unlike Tether’s USDT or Circle’s USDC, which are backed by fiat money or an equivalent asset, Terra is designed to maintain the peg through a mathematical algorithm and active trading. Recently, the UST has “decoupled” from its $1 value on high selling pressure due to the massive drain from Anchor.
Since they are tied together by the mint and chain burn mechanic, that selloff led to sharp drops in both UST and its sister token LUNA. Then the “disconnect” happened. When traders realized that $1 of LUNA was no longer worth $1 of UST, they went bankrupt. As a result, LUNA crashed by 98% of its price and lost most of its market capitalization.
What can we learn from Luna?
Faced with such a drop in LUNA, many investors may have a concern in their hearts: How can I prevent such a drop from happening to me? Regarding this concern, a veteran cryptanalyst from Bexplus gives his perspective. In fact, the characteristics of altcoins determine the volatility and high risk of LUNA. In terms of risk resistance, without a doubt, the major currencies (Bitcoin, Ethereum, etc.) are stronger.
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