The crypto ecosystem was filled with many surprising events in the past week. Cryptocurrency crashes have been widespread. To start with, the value of Bitcoin crashed below $30,000. This value accounts for less than half of Bitcoin’s all-time high value of $64,000 in 2021. However, while this development shook the entire crypto ecosystem to the core, its impact was not as shocking as the crash of Luna.
As a crypto investor or enthusiast, there are high chances that you would have heard about the sudden crash of Luna and how the coin’s value reduced to zero. This article will discuss the cause of the Luna crash and its possible effects on the crypto market. However, before deep diving into this, it is important to give a background on the Luna coin.
A Brief Background on the Luna Coin
Luna is the native cryptocurrency of what is called the Terra blockchain. It is similar to the way Ether (ETH) is the native token on the Ethereum blockchain. However, unlike Ethereum, Luna has a sister coin called the TerraUSD (UST). The TerraUSD is a stablecoin. Stable coins are cryptocurrencies that have their value tied to another currency or instrument. As the name implies, their value remains stable, unlike other cryptocurrencies. A common example is USDT which has its value pegged to the US dollar.
Moving on, both Luna and TerraUSD are interlinked. This is because the value of the TerraUSD is maintained at $1 through algorithmic processes. As such, as more people sell or “burn” their Luna coin in exchange for TerraUSD, its value can remain stable. However, this perfectly planned process was disrupted a week ago.
The Luna Crash
The major catalyst of Luna’s crash was the continuous crash of the TerraUSD. Ordinarily, the TerraUSD became popular due to the Anchor lending protocol. The lending protocol allows TerraUSD users to save their UST in an account with a guaranteed yield of 20%. However, the fixed yield was recently replaced with a variable interest rate. This led to the massive sale of the TerraUSD and Luna coins. As a result, according to CoinDesk, the UST deposits on Anchor dropped drastically. This created a ripple impact that lessened the price of Luna from about $116 (as of April 2022) to a shocking $0.5 in the last week.
Possible Effects on the Crypto Market
The effects of Luna’s crash on the crypto ecosystem are expected to be numerous. One of such effects is that it could restore the widespread perception that crypto assets are largely unsafe. Also, it could result in renewed calls for crypto regulation. For example, the US Treasury Secretary Janet Yellen, recently used Luna’s crash as a point of reference for stronger crypto regulation.
There is no doubt that the effects of Luna’s crash are still unfolding. However, the crash demonstrates the need for crypto developers to put adequate measures in place to prevent unprecedented crashes. This would prevent occurrences of widespread investment losses such as this.