The dramatic collapse of LUNA Classic (LUNC) (formerly Terra LUNA) from over $119 to $0.00001 in May 2022 became one of the most catastrophic events in cryptocurrency history. Here’s a detailed explanation of what happened:
1. Stability of the stablecoin UST
UST was an algorithmic stablecoin designed to maintain a value of $1, backed by LUNA through a minting and burning mechanism.
In May 2022, UST began losing its $1 peg due to massive withdrawals and market manipulation.
When UST fell below $1, the system started minting excessive amounts of LUNA tokens to stabilize UST, leading to an exponential increase in supply.
2. Hyperinflation of LUNA
To maintain the peg of UST, the protocol printed trillions of LUNA tokens in a short period.
The oversupply caused massive dilution of the value of LUNA, leading to a collapse from $119 to nearly zero.
3. Panic selling
The collapse triggered panic selling from investors.
The instability of the blockchain further amplified fear, causing a sell-off across the market.
