Luna-Terra crash: A Brief History of Failed Algorithmic Stablecoins And The Outcome

Luna-Terra crash: A Brief History of Failed Algorithmic Stablecoins And The Outcome


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The crypto market is volatile. That has been said so many times and it’s true, but the market isn’t a one-way street. There have been plenty of crashes in the past that the market has bounced back from. Luna-Terra is not the first stablecoin to crash, nor will it be the last.

In the last few years, there has been a surge in stablecoins. The main idea is to peg the value of these tokens to that of a stable currency like the US dollar. Apart from many shortcomings and flaws, one of the most popular stablecoin today is called Luna-Terra. But the month of May 2022 has been devastating for all the crypto owners with a great crash of Luna Terra and UST.

The Story of The Fall of Luna-Terra

Terra has been developed by South Korea-based Terraform Labs, founded in 2018 by Do Kwon and Daniel Shin. The team behind Terra includes engineers from Google, Facebook, and Apple. The project raised $32 million in a private sale and $25 million in a public sale. The project was intended to create a stablecoin that could be used on the Terra blockchain. However, the coin failed and was eventually delisted from exchanges.  A week after its soaring price of $83.04 on May 6, 2022, the coin collapsed to $9.45 on May 11, 2022. The estimated loss of all the coin holders is calculated somewhere around 88% of their holdings. In one week, LUNA has gone from being worth over $80 to less than $1.

It had been a long since the crypto market was experiencing fluctuations. Especially, after the US Federal Reserve increased its interest rates, the market had been experiencing serious price drops even with the stablecoins. On 6th May 2022, Bitcoin dropped 8.4 percent with an overall drop of 7.46 percent in the crypto market.

On the morning of May 8, the big whales started selling UST and Luna on platforms like Binance and Anchor. By the end of the day, approximately $285 million of UST was sold and it failed to maintain its 1:1 ratio with the US dollar. The Luna crypto currency too fell by approximately 7 percent.

And finally, by May 11 with failed attempts of LFG to save Luna and UST, Luna had fallen by 76 percent and was trading at $8.31. And UST too was far behind from its regular 1:1 ratio with USD and was standing at $0.6131.

A Saga of Other Fallen Coins

The great fall of Luna-Terra has deeply shaken the market and has left the investors more scared than ever to put their faiths back into the realm of stablecoins. But this isn’t the first known fall in the history of stablecoins, there have been many other coins that did start out great but failed to retain their price in the market.

Empty Set Dollar Stablecoin

The Empty Set Dollar stablecoin was launched in early 2018, around the same time as the BAC token. Both tokens use a seigniorage-based algorithm to maintain price stability around $1. However, Empty Set Dollar (ESD) employed a more sophisticated algorithm that included a price oracle mechanism to help stabilize the price. Interestingly, the coin became a favorite in the market at the early phase of its release. It took a really bad hit and fell from a whopping price of $22.74 to $0.01 within months of its launch.

Basis Cash Stablecoin

Basis Cash stable coin worked on a similar technology used by Empty Set Dollar stablecoin. Basis Cash was launched in the year 2020 and was an algorithmic stablecoin. But just like Empty Set Dollar, it too witnessed the same fate and failed ot maintain the hype in the market the prices fell from $1 to $0.30 in the month of January 2020.

Iron Finance Stablecoin

With the main objective of being dollar-pegged and being used for Defi applications, Iron Finance stablecoin launched in June 2021 as the first partially collateralized coin.  DeFi, then, had launched two cryptocurrencies, one was Iron Finance, which was a stablecoin while the other was Titan which worked like any other regular cryptocurrency. But with the rise in the price of Titan, made the investors sell their coins even at an early stage of their investment. This case of rug pull badly hit the market rate of the coin, and it dropped its price to ashes.

Is The Future Still Bright?

While the market crash of Terra has been devastating for many investors, it also throws water on the crypto startup industry that was depending on VC funding. As the crypto industry continues to grow and evolve, it’s important to learn from past mistakes. The Luna-Terra crash is a perfect example of what can happen when an algorithmic stablecoin is poorly designed and implemented. While there have been other failed attempts at creating an algorithmic stablecoin, the Luna-Terra crash is by far the most notable. While algorithmic stablecoins have failed in the past, there is always the possibility that they could succeed in the future. The Luna-Terra crash is a reminder of the risks involved in these types of projects, but it is also a reminder of the potential rewards.

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