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May has been a catastrophic month for the native tokens of many ecosystems but none has been hit as hard Terra. Terra ecosystem assets, LUNA and TerraUSD have suffered massive plunges in the market – the latter losing more than half of its value.
Bitcoin and altcoin price action
The top two assets by market cap – Bitcoin and Ether – have shed 19.63% and 16.65%, respectively in the last seven days. The majority of altcoins have fared slightly worse with Cardano’s ADA, which down 21.25% in the same period, among those with relatively smaller loses.
The price of Solana (SOL) has also seen a pull back, dipping 27.84% while that of Avalanche (AVAX) has plunged 38.96%. Yet, these losses are incomparable to the hemorrhage being witnessed in the Terra (LUNA) market.
LUNA saw a massive sell-off hours earlier falling from almost $20 at the end of yesterday to as low as $4.24. The token is currently changing hands at $4.59 – 85.97% in the red on the day. This is the first time the project has revisited single-digit territory since August 2021.
The price action is much the same for Terra’s algorithmic stable coin UST, albeit its figures are less extreme.
TerraUSD trading chart over the last 24 hours shows that the stable coin has sustained two dips, dropping from $0.92 at the start of the day to an all-time low of $0.30. The trading volume in this period has taken a beating, reducing by 10.21% to $4.349 billion as per CoinMarketCap.
Why is LUNA price on a free fall?
In recent days, there have been several concerns around the mechanism guiding and keeping afloat assets in the Terra ecosystems. MakerDAO’s Rune Christensen is one of the fairly-known people in the blockchain space who called out the ecosystem and its pegging mechanism that involves burning some tokens.
The MakerDAO co-founder had quite a lot to say regarding Terra and its related stable coin in January. Specifically, he asserted that they are not projects “built for resilience“ adding that they would crash as soon as “the market turns for real“ as they are ponzi schemes. While this isn’t the exact situation happening right now, there is no denying Terra is imploding and this is partly because of its stable coin peg.
On Monday, Securities.IO reported that the Luna Foundation Guard, the non-profit supporting Terra, had voted to allocate up to $1.5 billion to secure the peg. This was in response to UST losing its peg but as it turns out, the splurge didn’t provide enough to salvage the situation. The LFG has sought another sum exceeding $1 billion to help maintain the peg.
Need for stable coin regulation
The situation has worsened today with almost half of TerraUSD value being wiped away. While the stable coin has improved and bounced from its lowest mark ever to $0.4852 at writing, it is still deep in the red.
So huge is this development that the UST was among the topics of discussion during the recent congressional hearing. The US Treasury Secretary Janet Yellen brought up the TerraUSD during the hearing drawing attention to it as a case study for stable coin regulation.
“A stablecoin known as TerraUSD experienced a run and declined in value. I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks,” she said.
Terra is now an unwinding path and could crumble amid this cataclysmic crash. Pacifying remarks around a recovery recourse from the Terraform Labs chief Do Kwon have hardly soothed investors who are quickly exiting their positions.
The Terra founder wrote on Twitter “Getting close … stay strong, lunatics“ as an update to a post promising user that the network was close to announcing a recovery course of action for its stable coin.
Terra resorts to absorb the stablecoin supply that wants to exit
In a thread shared minutes ago, Do Kwon has resurfaced after going MIA to offer an explanation and proposed fix.
“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs. “
Kwon confirmed that the only way out of this muddle is quick and rapid absorption of the stablecoin supply that wants to exit. To that end, the Terra founder outlined a number of measures to bring calm to the market.
“First, we endorse the community proposal 1164 to Increase basepool from 50M to 100M SDR *) Decrease PoolRecoveryBlock from 36 to 18 This will increase minting capacity from $293M to ~$1200M, “ he wrote. “Naturally, this is at a high cost to UST and LUNA holders, but we will continue to explore various options to bring in more exogenous capital to the ecosystem & reduce supply overhang on UST.”
Do Kwon concluded the thread calling for a positive response from the Terra community.
To learn more about these tokens visit our Terra guide.
Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.