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Terra Crash Arouses Concern in Crypto Market

The complete collapse of Terra projects (its UST stable coin and the native LUNA token) is an unprecedented event for the entire crypto industry.

It will inevitably lead to a reassessment of approaches to risk optimization by investors, as well as change the structure of the entire crypto market.

What happened to Terra?

Immediately before its collapse, Terra confidently entered the TOP 10 cryptocurrencies by the capitalization of LUNA and the TOP 3 among stablecoins by the capitalization of UST. 

Moreover, a number of cryptanalysts and observers have positively assessed the innovative potential of Terra and its role in the global cryptosystem. 

The following 3 main applications implemented on the Terra platform were also positively evaluated:

  • Anchor is a decentralized protocol offering high-interest rates (up to 19.5% per annum) on UST staking;
  • Mirror – protocol for issuing assets in the Terra system (cryptanalysts of traditional stocks and bonds);
  • Chai is a mobile application for making payments.

Most of the crypto market participants involved in the “innovative” Terra schemes sought to earn as follows: they borrowed US dollars secured by bitcoin; then they bought UST stablecoin and staked it at its very high percentage using the Anchor protocol.

The market value of the LUNA token also showed rapid positive dynamics even in a falling market. This theoretically could allow holders of LUNA and UST to multiply their capital over the course of the year.

From August 2021 until early May 2022 Terra’s managers and developers were able to preserve the illusion of project stability. They actively attracted new investors and token holders.

But then the inevitable happened. Market participants had doubts about the security of the UST stablecoin, and it slowly began to lose parity 1:1 to the US dollar.

The first signals of such an imbalance appeared on May 9-10. And the situation became quite catastrophic in the following days. So, already on May 13, the UST price, which was formally supposed to be equal to $1, collapsed to $0.16 (according to CoinMarketCap).

At this point, it was clear that Terra management would employ a proportional increase in the supply of the LUNA token to normalize the rate of its UST stablecoin.

As a result: the more UST fell, the more LUNA tokens were released into circulation. 

Only four days after the crisis began, the overall supply of LUNA increased by about 20 times, from 346 million to 7.1 billion (according to The Block).

Naturally, instead of stabilizing the UST rate, such actions led to an even more rapid collapse of the LUNA these days.

As a result of the collapse of LUNA by 99.9% and the loss of any interest in the project among investors, Binance and other leading exchanges excluded this cryptocurrency from the list of quoted assets.

Imagine playing all your savings at PlayAmo casino, and it’s not your lucky day.

According to BeInCrypto, Do Kwon, the founder of the Terra ecosystem, acknowledged the failure of the UST stable coin. But he still declares the possibility of reviving LUNA, hoping to “roll back” the network to its initial state.

Do Kwon already had the experience of attempting and failing to create a stablecoin.

Still, his new project was still aimed at obtaining a short-term effect by providing unreasonable interest on staking and manipulative interference in UST pricing through the LUNA issue.

Management did not set its strategic goal to maintain backup coverage and provide extra crypto services.

The main priority was aggressive marketing and the growth of the project due to the constant attraction of new investors.

Even the onset of “crypto-winter”, and hence a higher concentration of risks, did not stop the Terra founders, only accelerating the inevitable collapse.

Consequences for the Cryptocurrency Market

This failure had to have an impact on the crypto market. The effects of such shocks will be felt for a long time in its many divisions.

Problems with one stablecoin (UST) inevitably led to concerns about the stability and security of its analogs.

On May 12, even the stablecoin segment’s leader, USDT, had a confidence crisis and a short-term dip in the exchange rate below $1. Nonetheless, the price of Tether’s tokens recovered after cryptocurrency holders were convinced of the sufficiency of Tether’s reserves to meet their obligations.

The collapse of Terra revealed the hidden dangers of investing in stablecoins and other speculative initiatives with insufficient reserves and inventive potential.

The recent market downturn has caused panic, exposing the complete inconsistency of the LUNA token’s connection to the UST stablecoin.

Also, read BRUCE LEE NFTS | LATEST NFT COLLECTION IN THE MARKET!

But the majority of other stablecoins and cryptocurrencies have successfully overcome these challenges and have reclaimed at least a portion of their previous positions.

A more competent risk assessment by strategic investors, as well as the “cleansing” of the crypto industry, will help the entire crypto market leave the crisis in the coming months. 

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