What Was The Reason Behind Luna’s Unprecedented Price Crash?

Last Updated May 16th 2022
5 Min Read

LUNA’s price crash has resulted in the token losing nearly all its value. Find out why. 

Terra’s LUNA token is critical in stabilizing the price of the protocol’s stablecoins. However, the de-pegging of the UST had significant consequences for the token, resulting in a spectacular crash, with the token losing 99% of its value. The crash had a domino effect on the larger crypto economy, as Bitcoin and other altcoins tumbled as well. Recent events surrounding LUNA are a timely reminder that crypto is prone to high levels of volatility. However, some investors are looking to buy the dip and continue to purchase LUNA. But what was the reason behind LUNA’s unprecedented price crash? Read on!

What Is Terra (LUNA)?

Terra is a blockchain protocol utilizing fiat-pegged stablecoins, which power price-stable global payments systems. The protocol’s whitepaper elaborates further, stating that the protocol combines the price stability of traditional fiat currencies with the censorship resistance of Bitcoin to offer quick settlements. Terra’s mainnet launched in 2019, offering stablecoins pegged to the South Korean Won, US Dollar, Mongolian Tugrik, and the IMF’s Special Drawing Rights basket of currencies.

LUNA is Terra’s native token and is key in stabilizing the stablecoins that the protocols offer, such as the TerraUSD (UST). The UST is pegged to the Dollar, which means that the value of 1 UST is equal to the value of $1. However, since the UST is an algorithmic stablecoin, it does not rely on a basket of reserve assets. Instead, the price of the UST is stabilized through smart contract-based algorithms that keep the value of UST anchored to the value of $1 by burning LUNA tokens and creating new UST tokens. Users can always swap their LUNA tokens for UST and vice versa.

LUNA also functions as a governance token, allowing token holders to participate in the protocol’s governance. Terra aims to be a peer-to-peer electronic cash system through stablecoins like UST.

  • Terra Blockchain - Terra is a blockchain protocol that powers global payment systems, offering fast and affordable settlements. It utilizes stablecoins pegged to the USD, Mongolian Tugrik, the SDR reserve, and South Korean Won.
  • LUNA - LUNA is the native token of the Terra ecosystem and is key to the stability of the stablecoins offered by Terra. LUNA's price dropped to nearly zero after reaching its all-time high just a month ago.
  • TerraUSD (UST) - The TerraUSD (UST) is an algorithmic stablecoin pegged to the Dollar. However, the UST lost its dollar peg and has lost almost all its value.

buy terra luna

Why Did The Luna Price Crash?

LUNA and UST were both created by Terraform Labs. The idea behind UST was to create an algorithmic stablecoin, where LUNA could be burnt to mint UST if it lost its 1:1 peg with the Dollar and vice versa. This idea worked until, if speculation is to be believed, there was a  coordinated attack on Terra, with a long-term aim of causing a Bitcoin crash, allowing “crypto whales” to purchase the crypto at a cheaper level. 

Several theories have been put forward about why the UST and LUNA went into a death spiral, with some alleging a potential rug pull by Do Kwon. Cardano founder Charles Hoskinson put forward another theory, alleging that a large institution had borrowed 100,000 BTC from Gemini. The institution in question then exchanged a significant chunk of the borrowed BTC for UST in an over-the-counter (OTC) trade with Do Kwon. Do Kwon agreed to the sale, which significantly lowered the liquidity levels of UST.

Following this, the institution dumped BTC and UST on the market, resulting in a liquidation cascade as investors panic-sold their LUNA holdings and unstaked their UST. The Anchor protocol, which is a Terra-based DeFi protocol offering 20% staking APY, also suffered. Massive withdrawals were made on Anchor, with deposits tumbling from over $14 billion to $11.2 billion in just one weekend. This negative market sentiment, along with a fresh infusion of fear, uncertainty, and doubt, resulted in the perfect storm as people rushed to pull their funds. With the dramatic drop in demand, the price of the UST plummeted, having a domino effect on LUNA and causing the UST to lose its peg to the Dollar. As things stand, the entity behind the attack on Terra is unknown.

Can LUNA Recover From Its Unprecedented Price Crash?

Do Kwon and the Terra community are still hopeful that the LUNA can recover from its unprecedented price crash. The Terra founder has been fairly active on Twitter, assuring followers that a recovery plan for UST is in the works. Several investors also believe that there is a chance that LUNA could recover if the UST recovery plan works as intended. Analysts think that Do Kwon and the Terra community would first need to address the issue of the UST de-pegging against the Dollar for LUNA to recover.

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