Cryptocurrency

LUNA Coin

What caused this coin to collapse? Is there a chance of this happening to coins like Bitcoin and Ethereum?

Luna vs. BTC

Bitcoin (BTC):

• Bitcoin was created as a decentralized digital currency and a store of value. Its primary goal is to function as “digital gold,” offering a secure, borderless, and censorship-resistant means of transferring and storing value.

LUNA (Terra):

• LUNA was designed as part of the Terra ecosystem, serving as a utility and governance token
• Its main purpose was to stabilize the value of Terra’s algorithmic stablecoins, such as UST, and support the ecosystem’s decentralized finance (DeFi) projects

https://www.youtube.com/watch?v=LVanuXZedbs

This downfall was primarily due to the failure of its associated algorithmic stablecoin, TerraUSD (UST), which was designed to maintain a 1:1 peg with the U.S. dollar through a complex mechanism involving LUNA.

Mechanism Behind UST and LUNA:

• UST was an algorithmic stablecoin intended to keep its value equal to one U.S. dollar.

This stability was managed through a mint-and-burn process with LUNA:

• Minting UST: Users could mint UST by burning an equivalent value of LUNA, reducing LUNA’s supply
• Minting LUNA: Conversely, users could mint 1$ worth of LUNA by burning UST at a fixed rate, reducing UST’s supply

This is how the price of UST is maintained at 1$.IfUS{T}^{\prime }spricefellbelow$1, traders could buy UST cheaply and redeem it for $1 worth of LUNA using 1 UST, profiting from the difference and helping restore the peg.

Example

1. If LUNA is Trading at $100:

• Burning 1 LUNA would mint 100 UST (because 1 LUNA = $100).
• Conversely, minting 1 LUNA would require burning 100 UST.

2. If LUNA is Trading at $50:

• Burning 1 LUNA would mint 50 UST (because 1 LUNA = $50).
• Conversely, minting 1 LUNA would require burning 50 UST.

What does minting mean?

Minting increases the total supply of a cryptocurrency by generating new tokens.

Sequence of Events Leading to the Crash:

• Massive UST Withdrawals: In early May 2022, over $2 billion worth of UST was unstaked from the Anchor Protocol—a platform offering high yields for UST deposits—and hundreds of millions were sold off.
• Depegging of UST: The large-scale selling pressure caused UST to lose its dollar peg, dropping its value to as low as $0.10.

Hyperinflation of LUNA: To restore UST’s peg, the system minted excessive amounts of LUNA, leading to hyperinflation. Between May 11 and May 13, LUNA’s supply ballooned from 780 million to 6.9 trillion tokens, causing its price to collapse.

Market Panic: The rapid devaluation of both UST and LUNA eroded investor confidence, triggering a market-wide sell-off and further driving down prices.

This mechanism seems stupid

I guess you’d need to understand Stablecoins first, to appreciate this.

On Do Kwon

Do Kwon misled investors about the stability of the coin, which is why he is getting charged with fraud.