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For the past several years, Terra has been building its name as a leader in the stablecoin space. Terra is a layer 1 blockchain built on Cosmos that specializes in stablecoin transactions. In late 2020, Terra unveiled its own algorithmic stablecoin, TerraUSD (UST). This stablecoin was supposed to always be worth $1.00. However, the coin quickly lost the stability it was meant to have and fell drastically in late spring 2022. Many are wondering if Terra’s UST failure is the beginning of the end for the project or if there is still room for a recovery.
Why is Terra (LUNA) Down?
Terra is a blockchain protocol that hopes to increase the overall use of stablecoins in the open economy. Stablecoins are known for their anchored prices, a stark contrast from the extreme volatility seen with most cryptocurrencies.
LUNA is the token that powers Terra’s protocol. Its main use is to provide liquidity for trades and keep the price of UST stable. Users can stake their tokens to provide liquidity for traders and earn rewards. This liquidity is also used by the Terra protocol to keep the price of UST at a constant $1.00. However, this system failed and allowed the price of UST to drop to $0.30 and fluctuated between 30% and 70% of its $1 peg.
To keep the price of UST stable, Terra will either burn or mint LUNA tokens. Since LUNA is used to back UST, influencing the supply of it can be used to keep the price of UST constant, at least in theory. When the price of UST falls below $1.00, LUNA is created and UST is burned. This increases the amount of LUNA for every UST and raises the price of UST. Conversely, when UST rises above $1.00, LUNA is burned and UST is created. This decreases the amount of LUNA for every UST and lowers the price of UST.
While this idea should work in theory, the creators of the project were not prepared for the possibility of a massive selloff.
For the first couple weeks of May 2022, a few large UST withdrawals were made. This sale of UST increased the supply and brought the price of UST down. When the price dipped slightly below $1.00, many became fearful and also sold. This brought the price down even further. In an attempt to combat this, Terra began burning UST and minting LUNA tokens. However, its system had a maximum amount of UST that could be burned. Once that limit was reached, the stablecoin began to freefall.
In the case of LUNA, as UST fell, many also exited their LUNA positions. This is because UST is an integral part of Terra’s protocol, so its failure could mean bad things for LUNA. So, LUNA’s price began to fall due to the selloff of UST. However, LUNA’s supply was also increasing rapidly in an attempt to keep the price of UST steady. This further decreased the value of LUNA.
In the late spring of 2022, LUNA fell from nearly $90 to around $1.00. Investors holding LUNA lost almost the entirety of their position.
Terra (LUNA) Price Movements
For the second half of 2021, and up until the crash of UST, LUNA had been steadily rising. In fact, it appreciated over 1,000% from its lows in May 2021 to highs of nearly $120 in April 2022. This rise was due to the steady increase in demand for stablecoins and UST. LUNA was continually increasing until May 2022 when the price of UST crashed.
After UST began to fall, LUNA dropped over 98% in just one day. The fragility of the project was shown, and many exited their positions as more holes began to show. Additionally, the market capitalization fell from nearly $30 billion to just over $1 billion.
Cryptocurrency Market Cycle
One way the cryptocurrency market can be measured is by comparing Bitcoin to other tokens. If altcoins, or any tokens that are not Bitcoin, are outperforming Bitcoin, then it is deemed “altcoin season.” It is not currently altcoin season, meaning Bitcoin is outperforming at least 75% of the top 50 cryptocurrencies. In fact, Bitcoin is outperforming almost all other major tokens most of the time, but that doesn’t mean that other tokens can’t gain ground on Bitcoin—even though they will likely never come close to reaching its current price per token.
While Bitcoin is outperforming other tokens, this is a relative term. The crypto markets have been suffering for some time, with major tokens down upwards of 50% in the first half of 2022. While a fall in prices may not be the direct cause of LUNA’s fall, it could certainly be an important factor.
Where To Buy Terra (LUNA)
Since Terra is a relatively large protocol, it can be bought on a variety of prominent exchanges, such as Coinbase Global Inc. (NASDAQ: COIN), FTX, Voyager and Gemini. These exchanges are known for their security, low fees, and overall ease of use.
To get started trading, register using an email and password. You will have to provide some basic personal information to verify your account. Then you can connect your bank account and begin trading.
Bonus: Keep an eye on the price of UST. If Terra can recover its stability, then they may be able to regain the trust of their users.
So, Is Terra (LUNA) Dead?
As of right now, the situation for Terra is pretty bleak. They lost a huge portion of their user base overnight. They were unable to keep the price of UST stable, even though they are known for their work with stablecoins. Overall, this event showed the complete fragility of the protocol. A relatively small selloff soon snowballed into an uncontrollable mess that the Terra creators are scrambling to fix.
In terms of the future, there are a couple cases for Terra. On a positive note, the price of UST could go back to $1.00 and regain its title as a stablecoin. This could attract more users and make the project relevant again. Conversely, the price could stay the same, lingering between $0.30 and $0.70, or fall lower. This would cause Terra to completely lose all trust and credibility with their user base. This would likely be the end for the project.
At the end of the day, a stablecoin’s worth comes from its ability to maintain a steady and constant price. If Terra can figure out a way to make this happen, they could be back on their way to being a top crypto project. If they cannot do this, then it could very well be dead.
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About Caden Pok
Caden has been involved with crypto since 2018, when he began investing, trading, and mining tokens. He took part in undergraduate research studying cryptoeconomics at the University of Michigan, where he will graduate Phi Beta Kappa with a bachelor’s in economics in 2025. He is experienced with DeFi technology and multiple blockchains, currently investing in Ethereum and Bitcoin.