The cryptocurrency market is crashing. The economic situation in the USA, inflation and the recent rise in interest rates have caused widespread decreases not only in the stock market, but also in some cryptocurrencies, which have experienced 80-90% declines compared to the maximum values ​​they have just achieved. Drops a few months ago accelerated and analysts point to a major culprit: the Terra ecosystem’s UST and LUNA cryptocurrencies. Some They have already been called responsible for crypto’s ‘Lehman Brothers moment’. Let’s see what all this is.

what is the world. It is an ecosystem with a blockchain like Bitcoin (with BTC token) or Ethereum (with ETH). In this case, Terra is designed to issue algorithmically stablecoins. Although the best known is Terra USD (UST), there are several associated with the platform.

These algorithmic stablecoins are backed by the native token of this unstable ecosystem, called LUNA, which we will see later. The Terra network is based on a PoS consensus algorithm and investors can stack through a decentralized application called Terra Station.

Stablecoins have a purpose. These algorithmic stablecoins of the Terra ecosystem are pegged to traditional fiat currencies, specifically the dollar, and the algorithms promise to maintain a 1:1 parity, which means 1 UST = 1 dollar for the vast majority of their holdings. The variations were minimal and with that, investors opted to stay in the cryptocurrency segment and switch from any cryptocurrency to UST and then use that UST to buy other cryptocurrencies as if using dollars.

What was the moon for?. Unlike stablecoins issued on the Terra platform, the LUNA is not a stablecoin, it is a traditional token, but is important as it serves to support and stabilize this link or ‘fix’ of UST and other Terra-issued stablecoins.

As Fernando Gutierrez explains in a thread At Twitter, LUNA is the mechanism that makes UST easy to support and operate. The supply and demand of UST has been regulated by the price of LUNA, which rises when UST supply falls and vice versa. Theoretically, if there is a divergence from the bond, you can arbitrage in the process by buying and selling LUNA.

UST’s evolution over the past week. This top green line has remained that way for almost the entire history of this stablecoin, but recent events have put it in a very compromising position. Source: CoinMarketCap.

business is confused. Some changes to the UST issuance meant that when someone paid with LUNA to purchase UST, these tokens were not “burned/destroyed”: some were held and these funds were used to buy bitcoin. The Bitcoin reserve was managed by the Luna Foundation Guard (LFG), an NGO dedicated to guaranteeing the UST bond and correspondence of 1 UST = $1.

A protocol called Anchor offered almost 20% if you invested UST: a complex investment that generated very high demand and helped LUNA gain so much in value: it hit over $116 at the beginning of May. Those responsible for the protocol announced that they had reduced interest to around 15% to ensure its sustainability, which in turn reduced demand for IHR. The result: pressure on the LUNA’s price.

LUNA loses 99% of its value. Added to all this is the economic situation and the decline of cryptocurrencies, which also affected the disconnected (‘depeg’) LUNA and UST. Some people argues It was stated that this was due to the attack of a large investor, but it was not confirmed. The fact is that a dollar was no longer an UST: its value fell and people started selling it in bulk. LFG used its bitcoin reserves to buy UST on the market and relieve pressure: it sold $1.5 billion worth of bitcoin, which worsened the decline of this and other cryptocurrencies.

The UST rallied some ground and then lost again and is currently at $0.48, having never moved from the $0.99-1.01 range on repeat. The future doesn’t look good though Trials from to save To UST and LUNA, it was worth only 5 cents a month ago, down from about $118 (it was 26 cents in our previous article, a few hours ago). By the way, in the LUNA subdirectory left it fixed At the top are the phone numbers for suicidal attention due to the enormous losses it has caused for so many people.