The Summary of Luna and UST Crash
The biggest crypto news to come out in the month of May would be Luna and UST crash. The crash spread to the concern of instability of algorithmic stablecoins, growing market fears, and the general state of the economy. More dramatically, This whole thing happened in a matter of hours and days!
So what is UST?
Simply put, UST is the algorithmic stablecoin of the Terra ecosystem. This means that its value is algorithmically pegged to the US dollar. There is also a mint/burnt mechanism between LUNA and UST pairs. Specifically, UST relies heavily on Luna, the Terra blockchain’s native currency, to balance and sustain its value. One dollar worth of Luna can be minted by burning one UST, no matter market fluctuations. Thus, one of the currencies can always be used to increase or decrease the supply of the other. Coupled with arbitrage trading, this system would theoretically inflate demand.
Unfortunately, a single mega trade threw everything off balance. Some believe the trade was in response to the Federal Reserve raising interest rates, which caused both stocks and crypto to drastically drop in value. Others believe that the trade was part of a targeted attack by some hedge funds meant to undermine the Terra ecosystem. Regardless, the end result was the same: the value dropped, which encouraged more sales, which led to even lower prices. The algorithm could not keep up with the death spiral, and by mid-May, billions of dollars worth of Luna and UST had been wiped from the crypto ecosystem.
Several other DeFi protocols, Wallets, Exchanges had already integrated or listed with both UST and Luna, which led to their prices dropping as well. Also, many retail users got affected during this crash. Additionally, an attempt to save UST by selling bitcoin was unsuccessful. Currently, Luna is valued at fractions of a penny while UST isn’t far behind. Though some investors hope to revive Terra via a hard fork, prospects aren’t especially high.
Why is it important to learn?
This isn’t the first time an algorithmic stablecoin has crashed, which means we must skeptically approach other systems that rely on them. Additionally, many investors previously predicted Luna and UST’s fate but went unheard. It’s important that we understand why this crash happened in order to move forward and prevent future crashes. Crypto can and should recover, but that recovery can only last if we learn and change.
What do we learn and move forward with our investment journey? Here are some of the advises:
- Always keep a diversified portfolio, don’t put all the eggs in one basket.
- Don’t be too greedy and handle risk management all the time, setup take profit and stop loss limit orders. Take profits and stop loss along the way.
- Follow the market and understand that all investments happen in a macro framework. The US Federal Reserve increases interest rates. This kind of news might have a huge impact in the market. Always need to follow the news and act on it.