For instance, the Luna supply pool adds and subtracts from Terra's supply to keep the price stable. Users can then use an algorithmic module created by the blockchain developers to burn Luna to mint Terra and even Terra to mint Luna. Let's understand what happened to UST and LUNA in this article.
It all started with a major Curve sell-off and the 3-pool was somewhat out of balance due to an $85 million UST-to-USDC swap. To restore equilibrium to the Curve pool, 50,000 $ETH was sold and 20,000 $ETH was sent to Binance.
This results in a $2 billion $UST withdrawal from Anchor. The peg is now fluctuating between 0.987 and 0.995. The first defence, though, is successful. The peg, however, never fully recovered.
Let's take a look at four things that were in place to ensure that the attackers would succeed before we get into the rest of the story:
So LFG drains $150 million $UST from Curve's 3-pool in preparation for the new 4-pool, and the attacker drains the Curve pool with $350 million $UST bought OTC.
The peg is gradually falling to 0.97-0.98. Anchor deposits are starting to plummet. The rumors are swiftly circulating. I recall the Anchor deposits being $14 billion at their peak, but you could practically see them plummet by $10 million per minute. It was complete chaos.
The peg is now $0.97, people are afraid, and the Nasdaq and stock market are both down significantly, resulting in lower $BTC, lower altcoin prices, and a plummeting $LUNA pricing.
LFG is stepping in to try to restore the peg by selling $BTC and buying $UST.
The deadly spiral is starting to get traction now. It happened because-
People are desperate to get out, hence anchor deposits are falling --> people are desperately trying to sell $UST on exchanges for a lower price. This puts new sell pressure on $UST, causing it to de-peg even further. The price of $LUNA is dropping due to concerns about how $LUNA / $UST operates.
A lack of understanding about how certain protocols work may lead to chaos same as what is happening in the market today. Therefore, it is very important to understand the fundamentals and technicals behind the project before planning to invest in any digital asset.
Moreover, algorithmic stable coins are prone to susceptibility because they are unregulated and because of the involvement of financial engineering and mathematical algorithms to maintain the peg. Invest wisely!
This material should not be construed as a recommendation for any particular cryptocurrency. It is not a trading recommendation. The cryptocurrency market is full of unexpected twists and overvalued assets. Before you buy something, do some research. Don't put more money into it than you can afford to lose.