LUNA and UST collapse

English May 11, 2022

Terra is a blockchain-based cryptocurrency that emerged with the aim of creating stablecoins made based on intelligent algorithms.

In general, stablecoins are backed by more traditional financial assets. Tether and Circle for example are backed by cash and bonds.

Stablecoins are a class of cryptocurrencies that need to be fungible with their fiat counterparts so that when someone decides to exchange/withdraw their fiat currency there is no difference in value. This is where the trust in stablecoins is based, if someone wants to exchange 1 UST for a dollar, they should be able to do it anywhere and at any time.

Terra also hoped to resolve the transparency issues of other stablecoins by forgoing cash reserves and creating LUNA, which would be the stablecoin’s source of value. For every digital dollar issued on Terra, the equivalent is burned on LUNA. The opposite is also true; users can always exchange 1 UST for $1 of LUNA and burn that UST.

However, in the last 72 hours, this coin-burning mechanism has collapsed. Resulting in the crash of stablecoin UST, causing LUNA to vertiginously. On Tuesday, a $1.5 billion loan from the Luna Foundation Guard failed to sustain the stablecoin, which has since hit a low of $0.30 today.

With the catastrophic event, Janet Yellen, Secretary of the US Treasury, took the opportunity to remember the importance of the need to regulate stablecoins and to warn about the dangers that cryptocurrencies provide to the financial system.

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Morel Hernandes

Writer passionate about politics, economics, blockchain and crypto-currencies.