Why Terra Luna Crypto Collapsed.
One of the top blockchain project, house to the popular algorithmic stablecoin TerraUSD (UST), which had recently become the fourth-largest stablecoin by market value but now sits at fifth, is near collapse as UST repeatedly fails to sustain its $1 peg and LUNA, the blockchain’s native token, nears zero.
Terraform Labs, the tech start-up behind the development of Terra, halted the production of new blocks on the network on Thursday “to prevent goverance attacks following severe $LUNA inflation and a significantly reduced cost of attack,” it said on Twitter.
A governance attack became less expensive because of the nearly-free price of LUNA – an attacker could cheaply acquire enough LUNA tokens to socially attack the network by forcing a majority vote. (Since Terra relies on a derivation of proof-of-stake (PoS) for consensus instead of hardware and electricity as in Bitcoin’s proof-of-work (PoW), coin ownership equals power. In Bitcoin, the amount of BTC you own doesn’t grant you more power on the network.), Bitcoin Magazine reports.
Stablecoins are digital representations of value in the form of tokens that attemptively maintain a one-to-one parity with a fiat currency like the U.S. dollar. Tether (USDT) and USD Coin (USDC) lead the market capitalization rank and are the most popular and widely-used stablecoins. However, they are issued (minted) and destroyed (burned) by centralized entities that also maintain the necessary dollar-equivalent reserves to back the coin.
Terra’s UST, on the other hand, sought to become a stablecoin whose minting and burning process was performed programmatically by a computer program – an algorithmic process.
Under the hood, Terra “promises” that people can exchange 1 UST for $1 worth of LUNA (whose value fluctuates freely according to supply and demand) at any given time. If UST breaks its peg to the upside, arbitrageurs can exchange $1 worth of LUNA for 1 UST, capitalizing on the premium with an instant profit. If it breaks the peg to the downside, traders can exchange 1 UST for $1 worth of LUNA also for an instant profit.
There should be need for enough demand for Terra stablecoins in the broader cryptocurrency ecosystem to “absorb the short-term volatility of speculative market cycles” and guarantee a better chance of achieving long-term success. This is what the project sought with BTC – create demand for UST by conferring more confidence in peg sustainability.
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