IS THE TERRA (LUNA) PROTOCOL DEAD? EVERYTHING YOU NEED TO KNOW ABOUT THE TERRA LUNA BLOCKCHAIN PROJECTS
Uncertainty has wafted around the future of the Terra (Luna) blockchain project, with many speculating that UST’s recent colossal price fall may have signalled an imminent end for the project.
Recall that Terra is a Cosmos-based blockchain project which emerged with its own stablecoin, TerraUSD (or UST), in 2020. Worthy of mention is that TerraUSD (UST) was designed as a stablecoin whose value would hover around $1 at all times. But it is rather unfortunate that UST could not maintain its stablecoin status for long before being struck by a huge uncontrolled price fall.
Prior to the disastrous free fall of UST, Terra was evidently a relevant blockchain protocol gaining momentum in the stablecoin space. But with the present situation, the credibility of Terra has been whittled down drastically, hence triggering fears about what the future holds for the project.
The recent Terra crash is widely attributed to the failure of the Terra project to continually maintain a constant price of $1 for UST. In other words, this failure has prompted the fall of UST to a price drastically below its $1 peg. Ever since the disastrous price fall, UST has been experiencing unfavourable price fluctuations.
It’s worth noting that LUNA and UST are closely connected in the sense that LUNA’s adoption (in the Terra-LUNA project) is aimed at two purposes –stabilizing the price of UST and provision of liquidity to traders. While LUNA is considered a vital instrument for sustaining the Terra blockchain protocol, it is notably the token intended to power the protocol.
While the liquidity influenced by LUNA enables creators of the blockchain protocol to stabilize UST’s price, it also gives room for users to earn rewards. In simpler words, what these users are obliged to do is promote the protocol by staking their LUNA tokens so that liquidity is made available to traders. The users get rewarded in return for the liquidity provided. It is to this end that we may assert that LUNA is pivotal to the sustenance of the Terra-(LUNA) project.
The relationship between LUNA and UST (Terra’s token) is so strong that when LUNA is largely supplied, it becomes theoretically possible to stabilize the price of UST. By and large, minting and burning of these two tokens (LUNA and UST) are necessary for a bid to regulate price. Since UST is officially pegged at a price of $1, it is expected that when UST experiences a price fall below this peg, UST should be burned while LUNA should be created. Through this regulatory mechanism, the supply of LUNA will rise above that of UST, thereby increasing UST’s price.
But when UST’s price increases above the $1 peg, there is a reverse whereby UST is created while LUNA is burned. While this causes the supply of UST to rise above that of LUNA, the consequent implication is a reduction in UST’s price.
If you’re able to make out what is meant in the two preceding paragraphs, we can safely assert that you have a clear understanding of the LUNA-UST relationship, at least in theory. Perhaps, the creators of the Terra blockchain protocol had clear foresight about this relationship and were convinced that things would always work out just as implied in the relationship.
Despite their ability to foresee the bright aspect of this relationship, the creators of the Terra project probably failed to envision the likelihood of a deep price fall and the accompanying risk. Therefore, the Terra blockchain project seems to have crashed as a result of the huge uncontrolled price reduction suffered by UST recently. For a better understanding of this situation, here is a brief overview of the happenings that prompted the crash:
A significant increase in the supply of UST was prompted by the fairly large number of UST withdrawals in the early weeks of May 2022. Due to the increase in supply, UST was –as expected –hit by a price decrease. Soon, many UST holders became scared and resorted to selling because UST’s price had slightly fallen below the $1 peg. When the creators of Terra observed that UST had been hit by a further price decrease, they resorted to the price regulation tactic of minting (creating) LUNA and burning UST. But unfortunately, Terra soon reached its burning limit and could not continue burning its UST tokens. With this, it became practically difficult for the creators to continually keep UST’s price within the $1 peg and this meant that UST would begin experiencing free fall.
Due to the strong relationship between LUNA and UST, it was highly predictable that UST’s free fall would negatively affect the value of LUNA. Reportedly, lots of traders abandoned their LUNA positions as a result of UST’s uncontrolled fall; it is noteworthy that the selloff of UST created a bad impression which eventually began rubbing off on LUNA.
Also noteworthy is that LUNA had begun to decline in value due to the increased supply of the token. Since any attempt to stabilize UST’s price would prompt an increase in the supply of LUNA, the latter token (LUNA) was drastically increasing in supply. Summarily, UST (the token of Terra’s protocol) failed drastically by falling extremely below the $1 peg and because there’s a strong relationship between UST and LUNA, UST’s free fall has necessitated drastically increasing the supply of LUNA (in order to stabilize UST’s price), thereby leaving a negative effect on LUNA’s value. Recently, LUNA’s drastic price fall has spelt doom for some investors, particularly as the price crashed from $90 down to $1.
On the side of Terra, it’s regrettably disastrous that its UST –which at some point looked to have cemented its status as a stablecoin –has eventually suffered free fall. For the fact that Terra was struggling to stabilize the price of UST, it was highly predictable that many investors would part ways with Terra.
A situation which seemingly started as a minor selloff (for UST) eventually worsened into an unrestrained and continuous price fall, thereby causing many investors to suffer heavy losses. There’s no denying that this situation has not only spelt great doom for Terra but also caused the project owners to lose dozens of users. Terra’s user base has shrunken and considering the situation at hand, many observers are of the feeling that the project’s future now appears very bleak.
But from a rather positive perspective, we may assume the creators of Terra might successfully turn around the situation and regain the trust and credibility of their user base. For this to happen, Terra’s creators must be ready to redeem Terra’s stablecoin status by pushing UST’s price back to the $1 peg.
If the current situation with Terra rather worsens, with UST’s price further plunging far below the $1 peg, we may justifiably assert that the Terra (Luna) project is gone for good.
Inasmuch as some investors hope that the creators of the Terra project might turn around the unfortunate situation, you may be tempted to think that the project is not yet over.
But considering that Terra’s UST was built to serve as a stablecoin, it’s very shocking that the coin has failed to maintain the $1 price peg. Bearing UST’s recent price crash in mind, you may be convinced that the Terra project has ground to a halt.