So What really happend ?

Back in May 2022, something shocking happened to a cryptocurrency called LUNC. Its price dropped from $119 to nearly $0 in just one day! Let’s break down the events in a simple way so new traders and beginers can understand.

Luna and Mechanism of Peggin with US Dollar- In simple terms.

Terraform Labs managed, the company co-founded by the in-famous Do Kwon managed two tokens: TerraUSD (UST) and Luna.

  • UST was an "algorithmic stablecoin" (No physical Pegging using FIAT) meant to stay equal to $1.

  • Luna was a regular crypto token like $BTC or $BNB , designed to help UST keep its $1 value through a system called arbitrage.

Here’s how the system worked:

  • If UST fell below $1, investors could buy it at the lower price and exchange it for $1 worth of Luna. This increased demand for UST, pushing its price back to $1.

  • This process was supposed to stabilize UST’s value while using Luna as the balancing tool.

What went wrong ?

  1. UST Lost Its $1 Value (Depeg):
    One day, UST dropped below $1 due to a massive sell-off. For example, imagine UST being worth only $0.80. People rushed to exchange their UST for $1 worth of LUNC to make a profit.

  2. LUNC Supply Exploded:
    As more UST was converted, new LUNC was created (minted). This caused LUNC’s supply to skyrocket—billions of new tokens were printed in days.

  3. Market Panic:
    With LUNC flooding the market, its price started dropping fast. Investors panicked, selling off both LUNC and UST, making the situation worse.

  4. Flawed System Design:
    The algorithm that linked UST and LUNC couldn’t handle the massive sell-offs. Instead of stabilizing the system, it created a feedback loop that led to total collapse.

The Aftermath

  • LUNC Crashed Over 99.99%: A token that was once worth over $100 became almost worthless.

  • UST Holders Lost Everything: Many people who trusted the “stablecoin” lost huge amounts of money.

  • Confidence in the Terra Ecosystem Collapsed: This event became a cautionary tale about the risks of algorithmic stablecoins.

The failure of LUNC and UST serves as a stark reminder to research and understand the risks behind complex crypto systems before investing.

$LUNA C Chart on the week on Crash

Do Kwon- The Co Founder of Terraform Labs