This is a very powerful and very brutal expiration that the crypto market has been inviting us to follow for the past three days. Along with Bitcoin and Ethereum dropping more than 20% each, the impossible happened to TerraUSD (UST) stablecoin, which lost its dollar traceability on Monday night.
As a result of this unprecedented episode, the price of Luna, one of the ten largest cryptocurrencies in the world, fell from $80 at the beginning of the month to less than $0.18 this morning (05/12/22, 11:45 AM). Losses are almost total for investors who have bought cryptocurrency in recent months. Ranked 63rd among cryptocurrencies by capitalization, Luna is perilously close to zero dollars. One of the biggest cryptocurrency crashes to date.
The last bounce occurred last night, causing the price of the moon to rise by more than 400%. But this did not last long, and groundless speculation soon subsided. The Luna Foundation, behind the Terra blockchain and its various tokens, has sent a bottle overboard asking investors to help it recapitalize its tokens. A lifeline that wasn’t enough. The pinnacle of the unthinkable: UST stablecoin is now worth more than the Luna token.
Why such a fall?
To understand the fall of the moon, we must understand the fall of UST. As we noted in an article published on Tuesday about its fall, it is an algorithmic stablecoin that does not rely on a reserve of the fiat currency on which it trades, placed in a bank. TerraUSD is based on an arbitrage mechanism based on the Luna cryptocurrency (from the same Terra blockchain). To put it simply: when the price of UST falls below the dollar, the exchange mechanism burns the UST for the Luna dollar.
Consequently, the price of Luna fell under bearish pressure and the sudden arrival of extraordinary volume caused the mechanism to spin. Cryptocurrency entered a spiral where investors left en masse (we are talking about the evaporated $40 billion) and where the price continued to fall without any support or psychological threshold. On the contrary, investors are also leaving the UST, which has lost what characterized it: exchange rate stability.
What caused the crash will matter a lot. We’ll try to get back to it lemon juicer as soon as possible. But one thing is for sure: faced with the debt of thousands of people around the world, some have certainly enriched themselves by billions. Do Kwon, developer of the Terra blockchain (who claimed he wants to “kill” competing stablecoins like DAI), may be under investigation.
Consequences in France
In recent months, UST has risen in the ranking of the most popular stablecoins and until this week was in third place. Its success is driven, in part, by betting platforms, including Anchor (52% of UST reserves), based on the Terra blockchain. With its help, investors can deposit the amount of their stablecoins for investments at 19.5% per annum. Enough to promise risk-free passive income… as long as the stablecoin doesn’t lose value.
In France, French investment service JustMining posted a warning on Twitter yesterday. For his clients who would choose his lending offer to generate income from their stablecoins, it will be necessary to act quickly because 40% of the product is affected by UST.
The collapse of the UST stablecoin has serious implications for our lending product.
We suggest our customers to read this article carefully: https://t.co/r7MdBhirud
We will get back to you soon with new information.
— JustMining (@JustMiningFr) May 11, 2022
“For example, with UST at $0.52 (11/05/22 at 4:30 pm) and risk at 39.58% of lending, the client under these conditions would confirm a loss of 18.98% of their position.”– explained in the company that developed its credit service using several specialized platforms, including … Anchor. “No matter what stablecoin you invest in on our platform, your capital is divided into different stablecoins”including ESN.
There is no reason to hope for a return to normal in the prices of the two Terra digital assets. The only hope is that the Luna fund, the source of the tokens, will find several billion dollars from investors to recapitalize their tokens. But investor confidence has certainly been lost. And no financial analysis can contradict this.