Interestingly, this time it’s not a tiny token or a one time wonder, but a constituent among the top-10 crypto tokens, if we exclude the dollar-pegged stablecoins. Here, we are talking about Terra (LUNA).
The native token of Terra blockchain named ‘LUNA’ tumbled to $24.14 from $61.99, registering a massive drop of 60 per cent within a day. The token is trading about 80 per cent below its peak close to $118, scaled last month.
Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems. It combines the price stability and wide adoption of fiat currencies with Bitcoin and offers fast and affordable settlements.
Its stablecoin, TerraUSD (UST), lost its dollar peg for the second time in three days, falling to as low as $0.65. As UST ‘depegged’ price of LUNA, its sister token, has taken a big hit.
Ganesh Kompella, Venture Partner, Tykhe Block Ventures, said the rise of LUNA and UST has been phenomenal, and it had a treasury reserve consisting of Bitcoin, which does seem a little dicey. It’s only a matter of time before it fails, he added.
“With the peg breaking, we lost a peak of $6 billion of perceived value in stables from the peg breaking, showing massive uncertainty in LUNA’s approach. Ideally, market makers would step in and correct the peg,” he added.
The fall was so steep that the market cap of Terra dropped below the market cap of its stable coin UST, according to the data from Coinmarketcap. Even it dropped down to the 14th spot among the largest crypto tokens from the eighth spot.
After the latest slump, LUNA’s m-cap has dwindled to $10 billion, whereas US Terra (UST) was commanding a superior m-cap of more than 16.36 billion.
Raj A Kapoor, Founder, India Blockchain Alliance, said in the last few hours, about $830 million has been liquidated from the crypto economy and Terra is no exception.
“This was a direct response to the Luna Foundation emptying its Bitcoin and Ethereum Wallets,” he said.
The LUNA token gets ‘burned’ when its stablecoin deviates from its peg and while trying to keep the price at $1 to protect it from getting burned more, it is actually causing prices to fall further, Kapoor said.
Echoing the same tone, Edul Patel, CEO & Co-founder, Mudrex, said there are multiple factors behind this drop, including its high beta and offloading from a big whale, which has impacted the stability of LUNA.
On the other hand, the volumes of Terra have on a mammoth scale, rising about 160 per cent, as tokens of more than $12.12 billion have exchanged hands in the last 24 hours. Interestingly, it is more than its current market cap.
The Luna Foundation Guard deployed $1.5 billion in reserve assets to shore up UST’s peg. The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was for precisely this moment. But the solution hasn’t made a difference.
“Terra has been acquiring treasury chests of Bitcoin to maintain the stability of its algorithmic stablecoin, UST,” said Patel. “As soon as BTC dipped, Terra’s LUNA was under massive selling pressure.”
Market experts said that it is better to avoid any fresh buy on the counter at present and sit on the sidelines for the time being. One should not jump the gun and impulsively buy.
Since the market is down, for the high-risk appetite investors, it is a good opportunity for averaging the cost, Patel from Mudrex suggested. “While for those with less-risk appetite, investors should observe the market movements closely,” he adds.
Kapoor said that Terra is still a good buy, but it’s time to be cautious. Terra is still potent enough to grow, as it has expanded its operation area beyond Asia. “Markets have turned bearish, but Terra still has some legs left,” he added.
However, not everyone is bullish on Terra’s stablecoin project, which is backed by heavy bitcoin reserves. A few of them are critical about it, anticipating a failure in such projects.