A couple of weeks ago, luna was worth more than $80 per coin and was considered to be one of the fastest-growing and promising Level 1 coins and platforms. There were some concerns given that the founder of the project, Do Kwon had been previously associated with projects that had failed.
However, many saw Terra blockchain as becoming the next major Level 1 platform. Investors who had watched the more than hundred-fold return for investors in other L1 coins like Solana or Avalanche were eager to not miss the next big trade and also piled in. Instead, the Luna ecosystem went from being worth over $40 billion to under $500 million in less than a
week's time.
Luna started trading in late 2021 at around $36 and hit a high of $116 in early April. Currently, it's trading for fractions of a penny. This will certainly have implications for the cryptomarket and hopefully, lead to more risk assessment among traders.
What Happened?
One of the things that made the Terra blockchain unique was its use of an algorithmic stablecoin - TerraUSD. Stablecoins are necessary for L2 and L3 apps, but most stablecoins are backed by actual reserves which is a feature and a bug as it's essentially recreating legacy finance tools that crypto is supposed to disrupt.
There's been tremendous interest and confusion about stablecoins especially as they tend to be opaque with people questioning the validity of the reserves. But, the key purpose of stablecoins is to keep their peg with the dollar.
The end of luna became an inevitability, once TerraUSD could no longer defend its value against the dollar. Once, this trust was broken, luna quickly collapsed.
In order to attract money to TerraUSD, they offered a nearly 20% yield. However, traders had discussed a vulnerability in the protocol which they were able to exploit during the selloff in crypto markets as they took money out of TerraUSD which sent it lower. Due to a limit on how much luna can be burned every day, the algorithm wasn't able to push prices back to $1.
This led to an increased loss of confidence among stablecoin holders and caused an even bigger selloff, and it led to luna becoming worthless.