{"id":53004,"date":"2022-06-09T10:00:58","date_gmt":"2022-06-09T02:00:58","guid":{"rendered":"http:\/\/wordpress-my-161844363.ap-southeast-1.elb.amazonaws.com\/articles\/?p=53004"},"modified":"2022-06-09T10:30:45","modified_gmt":"2022-06-09T02:30:45","slug":"rise-fall-luna","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/rise-fall-luna","title":{"rendered":"Is LUNA Dead? Lessons We Can Learn From This Crypto Crash"},"content":{"rendered":"

Ever since its inception, cryptocurrency has always been a point of debate among investors. Some believe that cryptocurrency and the decentralisation of financial markets will be the future of currency, while others believe that cryptocurrency is nothing more than an elaborate scam, a glorified form of Ponzi scheme that has somehow managed to hook millions of unsuspecting victims.<\/span><\/p>\n

But even with its many detractors, cryptocurrency still managed to make a place for itself in the market, as evidenced by Bitcoin and Ethereum\u2019s meteoric rise. In 2021, Bitcoin managed to reach a historic high of RM269,248.83 ($61,374.25), while Ethereum reached a high of RM19,420.11 ($4426.74).<\/span><\/p>\n

Which is why the crash of the LUNA cryptocoin in May 2022 caught so many people by surprise. Over the span of two days, LUNA\u2019s price plummeted from RM526.44 ($120) to RM0.088 ($0.02), a 99% drop. In the following days, LUNA\u2019s price managed to drop even more,\u00a0 bottoming out at RM0.0000049 ($0.00000112), before being delisted completely.<\/span><\/p>\n

So what happened?<\/span><\/p>\n

<\/span>Rise of LUNA<\/b><\/span><\/h2>\n

But before we can discuss the crash, first we have to talk about where LUNA came from, and how it rose into prominence in the market.<\/span><\/p>\n

LUNA was first developed by the <\/span>Korean firm Terraform Labs<\/span><\/a>, as the native token for Terra, their own self developed blockchain.<\/span><\/p>\n

LUNA, TerraUSD (UST), and the Terra blockchain is part of an algorithmic stablecoin that worked to maintain its value.<\/span><\/p>\n

A stablecoin is a type of cryptocurrency designed to hold a steady value. How this is done varies according to the type of currency. Some being pegged to existing fiat currency, or are backed by physical assets being used as collateral.<\/div><\/div><\/span><\/p>\n

The setup wasn\u2019t anything new. Stablecoins were a thing ever since 2015, but LUNA saw an unprecedented rise in the market, largely due to the charisma of Do Kwon, the co-founder and chief executive officer (CEO) of Terraform Labs.<\/span><\/p>\n

Do Kwon carried himself on social media with an unabashed swagger, going as far to label LUNA detractors as <\/span>\u201cthe poor\u201d<\/span><\/a>, which inspired an almost cult-like following on social media, showing unseen levels of loyalty and following towards Do Kwon.\u00a0<\/span><\/p>\n

At one point, even billionaire Mike Novogratz got a tattoo <\/span>of a wolf howling at the moon on his arm<\/span><\/a>, signifying his commitment towards LUNA and UST.<\/span><\/p>\n

Thanks to Do Kwon\u2019s charismatic social media presence and the amount of followers he garnered, investors piled into the LUNA coin, giving LUNA and UST a combined net worth of $60 billion at one point.<\/span><\/p>\n

<\/span>Fall of LUNA<\/b><\/span><\/h2>\n

In order for us to understand the fall of LUNA, first we need to understand how LUNA, UST, and Terra worked. UST and LUNA are codependent on each other, and they exist in the Terra ecosystem. By design, users can always swap between LUNA and UST or vice versa, at a guaranteed price of $1.<\/span><\/p>\n

In simple terms, here\u2019s how it works. UST is pegged to the US dollar, which means that it\u2019s designed to maintain its value at $1. If the price of UST drops for whatever reason, then a corresponding amount of LUNA will be removed from circulation to stabilise UST. Similarly, a UST price increase will see LUNA being removed to maintain parity.<\/span><\/p>\n

This basically manipulates supply side economics to influence the price of the cryptocurrency.<\/span><\/p>\n

So for example, if UST hits 0.99, then a small amount of LUNA will be burned to stabilise UST, and if UST hits 1.01, then a small amount of UST will be burned to stabilise LUNA.<\/span><\/p>\n

This $1 price point is important, because this means that as explained above, if demand of UST rises and causes its price to rise above $1, LUNA holders can make a risk-free profit by swapping $1 of LUNA to create one UST token.<\/span><\/p>\n

In this process, a percentage of LUNA is burned (permanently removed from circulation), and the remainder is deposited into a community treasury. By burning LUNA, this process creates scarcity of LUNA, and by swapping it into UST, it will dilute the market and drive the price of UST back down, to the peg of $1.<\/span><\/p>\n

That\u2019s how LUNA and UST are codependent on each other.<\/span><\/p>\n

Well, that\u2019s how it’s supposed to work. Until it didn\u2019t.<\/span><\/p>\n

It all started on <\/span>May 7, 2022<\/span><\/a>, when\u00a0 $2 billion worth of UST was taken out of the Anchor Protocol, which meant that it was now unstaked, and hundreds of millions of that amount was quickly sold. Why this happened is still a point of debate, but one thing for sure is that it caused the price of UST to fall to $0.91. This caused more investors to panic, and more sold their UST, which caused the price to fall and fall further.<\/span><\/p>\n

For LUNA holders, it was even worse as the plummet of UST quickly meant that LUNA also lost a huge chunk of their value.<\/span><\/p>\n

The crash kept going and going until it delisted completely.<\/span><\/p>\n

In hindsight, LUNA has always exhibited plenty of red flags. UST\u2019s Anchor platform offered a return of 20%, which is insanely high compared to the US government bonds, which were paying around 2% and savings accounts which were paying less than 1% in returns.<\/span><\/p>\n

Analysts have said that it\u2019s unsustainable<\/span><\/a>, but thanks to Do Kwon\u2019s charismatic presence and blind faith, investors kept putting more money into it.<\/span><\/p>\n

The result? A historic crash that rattled the whole cryptocurrency market. In the aftermath, there has been <\/span>reports of suicide<\/span><\/a> due to the crash, and <\/span>Do Kwon\u2019s house was trespassed into<\/span><\/a>.\u00a0<\/span><\/p>\n

<\/span>What can we learn from the LUNA crash<\/b><\/span><\/h2>\n

So now that we understand what LUNA and UST is, and what caused the crash, now let\u2019s have a look at 4 things we can learn from the historic crash.<\/span><\/b><\/p>\n