• May 27, 2022

The death spiral of TerraUSD (UST), causes a loss of 98% of the value.

The death spiral of TerraUSD (UST), causes a loss of 98% of the value.

Although it seems incredible, one of the TOP 10 on the market is practically dying. LUNA came to lose up to 99.42% from its all-time high of $119.55, to a low of $0.27 reached today, the product of a death spiral that initiated the fall of the Terra stablecoin (UST).

The volatility is extreme at the moment. LUNA is trading at $1.72, recovering more than 130% from the minimum reached a few minutes ago. However, the damage is already done.

Its market capitalization is now $1.002 billion, so it has been displaced to the TOP 60 of the CoinMarketCap ranking.

LUNA is practically dying, in the middle of the death spiral caused by UST. Source: CoinMarketCap.
LUNA is practically dying, in the middle of the spiral caused by UST. Source: CoinMarketCap.

UST falls to a low of $0.22, causing a bleeding of the MOON price

The loss of the parity of the UST with the dollar, requires sales of LUNA to try to keep its price anchored to the US currency, thus taking out almost the entire capitalization of this cryptocurrency.

As Terra USD is an algorithmic stablecoin, its price is set depending on demand.

If there are many buyers, and the UST price exceeds $ 1, then it is sold, and on the other hand, LUNA is bought, generating a rise in this second currency (which was happening during the last few months, as the adoption of this stablecoin increased).

In the opposite case, if there is a lot of selling pressure, as has been happening, then it is necessary to sell LUNA to inject liquidity into the UST market, and thus try to bring the price to its ideal level of $1.

With the massive outflow of capital seen during the last few days in the stock market, the liquidity to counterbalance fell short, and LUNA began to wrap herself in a death spiral.

In a few lines

To summarize what happened, and what the current situation is, let’s quickly see how analyst Jaume describes the domino effect that occurred.

Summary thread of what happened with LUNA and UST, made by analyst Jaume. Source: Twitter.
Summary thread of what happened with LUNA and UST, made by analyst Jaume. Source: Twitter.

I think this makes it pretty clear what happened. It seems unlikely that Luna will be part of the TOP again.

Do Kwon, founder of Terra, explains that the only way forward will be to absorb the supply of UST that is trying to exit the market, using LUNA as a counterparty. The thing is that liquidity is already insufficient.

He also announced that they applied a proposal for a technical modification, to increase the minting capacity, which would allow to absorb UST more quickly.

In this thread he added that they are looking for alternatives to attract external capital, in order to reduce the oversupply of Terra USD.

This is the current situation of UST according to Do Kwon, and he assures that LUNA will continue to be harmed. Source. Twitter.
This is the current situation of UST according to Do Kwon, and he assures that LUNA will continue to be harmed. Source: Twitter.