Luna is a cryptocurrency that has gained significant attention in the decentralized finance (DeFi) space due to its role in the Terra ecosystem. Launched in 2019, Luna is a utility token that is used to maintain the stability of the Terra platform’s stablecoins, such as TerraUSD (UST).
In this article, we’ll take a closer look at Luna and its unique features.
How was the Luna coin born?
Luna is a cryptocurrency that was created by the Terraform Labs team. It is built on the Terra blockchain, which is a decentralized platform that aims to provide a stable and scalable infrastructure for various blockchain-based applications.
The idea behind Luna is to create a stablecoin that is pegged to the value of fiat currencies, such as the US dollar. This is achieved through a system called the Stability Mechanism, which is designed to maintain the price of Luna at a 1:1 ratio with the underlying asset.
Luna was launched through an Initial Coin Offering (ICO) in 2019, during which the team raised around $16 million in funding. Since then, Luna has gained popularity among cryptocurrency traders and investors, and its market capitalization has grown significantly. Today, Luna is used for a variety of purposes, including payments, remittances, and as a store of value.
Stablecoin Stability Mechanism
One of the main features of the Terra ecosystem is its Stability Mechanism, which is powered by Luna. The Stability Mechanism is designed to maintain the stability of Terra’s stablecoins by adjusting the supply of Luna based on market demand. When the demand for Terra stablecoins increases, the system automatically mints new UST tokens and sells them for Luna on the open market. Conversely, when the demand for Terra stablecoins decreases, the system burns UST tokens and releases Luna back into the market.
This mechanism ensures that the value of Terra stablecoins remains stable, even during times of high volatility in the cryptocurrency market. This stability makes Terra stablecoins an attractive option for use in commerce, remittances, and other financial applications.
The Terra ecosystem has become one of the most popular DeFi platforms in the cryptocurrency space, with a growing number of protocols and applications being built on top of it. Some of the notable projects within the Terra ecosystem include:
- Anchor Protocol: A DeFi protocol that offers stable yields on stablecoin deposits.
- Mirror Protocol: A decentralized platform for trading synthetic assets that track the value of real-world assets, such as stocks and commodities.
- Pylon Protocol: A platform for tokenizing and trading real-world assets, such as renewable energy certificates.
Why did “brothers” UST – LUNA become famous?
UST and LUNA are sometimes referred to as “brother” tokens because they are both native tokens of the Terra blockchain, and they work in tandem to achieve the platform’s goals.
UST, or TerraUSD, is a stablecoin that is pegged to the value of the US dollar, while LUNA is a utility token that is used to maintain the stability of the Terra ecosystem through its Stability Mechanism. The Stability Mechanism is a unique feature of the Terra blockchain that enables it to stabilize the value of its stablecoins in response to market demand.
One reason why UST and LUNA have become famous is because of their success in achieving their goals. UST has become one of the most popular stablecoins in the cryptocurrency market, with a market capitalization of over $9 billion as of March 2023. Meanwhile, LUNA has seen significant growth in value, with its price increasing from around $0.30 in early 2021 to over $60 in March 2023.
Additionally, the Terra blockchain has gained attention for its fast transaction times and low fees, making it an attractive platform for decentralized finance (DeFi) applications. This has led to the development of various DeFi protocols and applications on the Terra blockchain, further increasing the demand for UST and LUNA.
But then Luna still dropped in price?
The price drop of LUNA stems from the confusingly high interest rates of the Anchor Protocol. In March 2022, unable to secure the promised interest rate, Anchor passed a resolution that would replace the fixed rate with a variable rate.
That is, instead of the ideal interest rate of 20%, which no longer exists, the rate will vary according to changes in the market. Of course, this makes excellent sense in terms of the ups and downs of the market, but most investors do not.
A significant quantity of UST was removed from Anchor just a few days after the resolution was published. The stablecoin algorithm has “fallen back in time” due to the reality that there is a significant amount of UST in circulation once more. As a result, the value of the UST coin is no longer maintained at $1 USD but instead marginally declines.
The “younger brother” of the UST will take over when the value of the UST is no longer kept at 1 USD. The price of the cryptocurrency LUNA is currently rising and it appears to have a tremendous investment potential. Because of this, a sizable portion of investors have looked to move their funds from UST to other cryptocurrencies, particularly LUNA. Due to this, LUNA has now reached its peak era.
LUNA reached a high of 119,55 USD/LUNA at one time.
Relating to UST once more, the fact that investors sold off a significant quantity of this cryptocurrency quickly led to a sharp decline in its value. (taking place around the beginning of May 2022).
When the value of the UST declines, the stablecoin program that was previously created will need to take action to raise the value of the currency to the level of 1 USD. By specifically “burning” the UST coins in the system, the program decreased the number of coins sold (similar to decreasing supply and increasing demand).
More LUNA coins will be created as more and more transactions are carried out on the UST platform (coin burnings are also deemed transactions). As a result of this move to save the UST, the value of the LUNA coin will undoubtedly decline.
When LUNA’s value drops significantly, many buyers will begin to stockpile it in the hopes that it will rise again. From there, more UST coins are produced and more deals are completed. Inadvertently, this lowers the value of the UST currency because more LUNA coins are generated as a result of the UST being burned by the stablecoin algorithm. Consequently, the LUNA coin’s worth kept declining. After that, a vicious cycle was started that would never end, dragging the value of both coins to zero.
It is challenging to fix this failure of the LUNA-UST pair because the stablecoin algorithm is primarily to blame. In order to fix its errors, the Terra organization chose to release LUNA cryptocurrency version 2.
Consequences that follow
The collapse of the LUNA-UST currency pair led to many consequences, even affecting the entire cryptocurrency market. Some serious consequences that we can mention:
First, of course, the one who suffers the most is still the user. You can imagine that if on April 4, 2022 you own a LUNA worth about 1 million USD, by May 13, 2022 that amount of LUNA is only worth about 500 USD.
Second, when one of the “big guys” in the cryptocurrency world fails, most users will become afraid and cease to engage, which will cause other cryptocurrencies to decline as a result. The “king of digital money,” Bitcoin, is the finest illustration of this.
Even though the impact will be minimal, this decline will also have an impact on cryptocurrency exchanges.
Additionally, a large number of businesses that use cryptocurrency apps in their operations will also be impacted when the cryptocurrency market is weak. The owner of the most well-known NFT game currently available, Axie Infinity, Sky Mavis, is the most apparent example in this situation. The worth of ASX coin, the virtual currency used in the game, fell following the demise of LUNA.
This article gave you an overview of the LUNA cryptocurrency and why it collapsed. After the failure of the Luna coin, we can learn the lesson that you should only invest when you understand very well about the coin you intend to invest in.
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