$ 95,432.0
BTC
-0.97 %
$ 1,825.39
ETH
-0.56 %
$ 0.6854
ADA
-3.58 %
$ 590.89
BNB
-1.20 %
$ 145.60
SOL
-1.91 %

Guneet Kaur
May 16, 2022

What happened to $and $LUNA?

Luna
Stablecoins are cryptocurrencies with stable prices even when the crypto market falls. The coin's supply and demand are balanced by an algorithm. Because of their non-volatile character, stable coins are ideal for borrowing and lending. However, the current UST-LUNA crash opened the eyes of investors to understand the fundamentals of algorithm stable coins.

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.

Massive sell-off curve

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.

Heavy withdrawal

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.

Factors that let attackers succeed

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:

  • The assailants took out a $100,000 bitcoin loan from Gemini (which they short).
  • The attackers agree to a $1 billion $UST settlement. OTC
  • In March and April, LFG (Luna Foundation Guard) is buying $BTC as a defense mechanism to protect the peg.
  • The announcement of the change from three to four pools
  • 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.

    No liquidity on the curve

    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.

    A massive de-peg

    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-

    • $UST dumping by attackers
    • LFG is attempting to restore the peg by purchasing $UST (selling $BTC) as the price of $BTC falls due to significant sell pressure.
    • Increased anxiety as the US dollar depreciates even more.
    • 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.

      Final thoughts

      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!

      Disclaimer:

      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.

      What happened to $and $LUNA?
      Guneet Kaur is a certified credit and securities analyst. She is MSc Fintech graduate (with distinction) from the University of Stirling, Scotland, United Kingdom. Prior to MSC, she has also done MBA from GNDU (gold medal) and has worked as a global client and partner business manager with Singapore-based MNC. She has written various conference papers and has authored a book titled 'The Magic Of Compounding'. She was the Finalist of the Women in STEM-Lovelace Colloquium that was held in 2019 at the University of Salford, UK, and Royal Bank of Scotland's Hackathon in 2019. Her expertise includes financial modeling, Cryptocurrencies, DeFi, Blockchain, quantitative analysis, academic research, business valuation, business analysis, data visualization, financial fraud, and AML analysis.

      Top Picks