A massive drop in the value of the token yesterday left many TERRA LUNA investors with a tiny fraction of what they invested. So how did this happen?

In just seven days, Terra (LUNA) holders have lost 96 percent of what they had, up to now! Over the last 7 days, the price of LUNA has dropped by over 96 percent to $3.36. Data on CoinMarketCap at the time of publication shows that LUNA fell by around 90 percent over the course of a single 24-hour period. 

A new alarming drop in Terra's ranking of 37th in terms of its market capitalization is also concerning. It is even more surprising given that Terra used to rank among the top 10 cryptocurrencies on CoinMarketCap a few days back. 

Over 44% has been lost in the last 24 hours by TerraUSD (UST). Another popular crypto from Terra fold, TerraUSD (UST), has lost 49% in the last 7 days. Likewise, the UST ranking has fallen from 15 to 15, below meme coin Shiba Inu. Within the last 24 hours alone, LUNA has fallen over 82 percent in market share, losing 94 percent in the last 7 days.

Why did LUNA and UST crash?

TerraUSD, which is tied to the dollar and uses an algorithm-based Stablecoin, started falling in value. As a result of the exchange's temporary suspension of its UST and LUNA withdrawals, these cryptos' prices tumbled. 

With the current situation, algorithmic-based stable coins have been exposed as problematic. 

Terra's fall can be attributed to large sell-offs of the LUNA tokens after the algorithmic stable coin was reported to be "de-pegged.". The bear market must also have added to this selloff," said EasyFi Network CEO and Co-founder Anshul Dhir.

It became apparent on Saturday that Terra was in trouble when UST deposits on Anchor began dropping.

It is important to understand the Anchor lending protocol as the key to understanding why UST collapsed this week.

The drop in UST deposits on Anchor was one of the first signs that the stablecoin was in trouble. To users who deposit their UST on Anchor's platform, the company offers market-leading yields of up to 20%. The anchor held about 75% of UST's circulating supply before it started declining late on Saturday. A total supply of $18 billion is made up of $14 billion of UST. 

Due to the huge amount of UST locked up in Anchor, it was clear that the huge majority of investors were only buying the stablecoin to reap its sweet yields. Anchor's relationship with UST can either be seen as an ingenious mechanism for producing value for the fledgling stablecoin, or as unproductive marketing spending that attracted unloyal mercenaries. 

Both LUNA and UST prices have dropped sharply

There was major selling pressure on the Terra ecosystem caused by the massive flood of Anchor users onto the open market. 

As an algorithmic stablecoin, UST and its sister token, LUNA, use on-chain minting and burning in order to maintain their values at around $1. Essentially, this mechanism serves as a sort of shock absorber for the volatility of UST, as $1 worth of UST will result in $1 of LUNA. 

LUNA and UST prices both fell sharply as a result of the massive selling pressure. Ultimately, LUNA surpassed UST in market cap for the first time. Some watchful traders feared the entire system could become insolvent when there was no longer $1 worth of LUNA per $1 of UST (because UST holders would not be able to convert into LUNA if there were a bank run). The psychological impact of nose-diving prices and a UST-LUNA market cap "flippening" led to even greater sell action, whether this fear was justified or not (we'll discuss it in the next section on LUNA's bitcoin backstop).

Price volatility is extremely high

Even though Terra's rescue capital had moderate success on Tuesday, the prices of both UST and LUNA were extremely volatile throughout the night and into the early morning hours on Wednesday.

As a result, all bets on a smooth UST recovery were off at this point. UST had fallen to an all-time low, even though Do Kwon announced a rescue plan on Twitter. As of earlier this year, the price of LUNA was over $120. A short-term decline in the value of UST led to questions about whether the coin could ever regain its previous level of stability.

The net transfer volumes speak for themselves!

Bitcoins worth hundreds of millions of dollars used to rescue UST were likely sold straight to market this week. Traders hoping to defend UST's peg would have had to withdraw funds in non-BTC currencies.

BTC net transfer volumes show a spike in volume on May 9-10, when Terra's reserves were first deployed. Terra's freed-up reserves may not have accounted for all of these spikes, but they certainly would have had an impact. 

Terra's BTC reserve dumps likely added to the market's turmoil. In the midst of all the turmoil this week, UST's impact on the wider market is an important footnote. If not managed responsibly, stablecoins - which are the foundation of decentralized finance - not only pose a risk to individual traders, but also pose a systemic risk for the entire crypto ecosystem.

What can we expect from Luna, UST in the future?

The team managing UST and LUNA will have to prepare proactively to defend the stability of the $UST peg under these macroeconomic conditions. Some recovery plans have also been mentioned.

Is Terra Luna still viable?

UST is being revived by the Luna Foundation Guard, LUNA's stewards. A $1 billion campaign has been launched to raise funds, which they believe can help them achieve this goal.

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