- The recent Luna and UST tokens crash is a harsh lesson for investors.
- The two algorithmic stablecoins seemed too big to fail, but they did.
- Read on to find out what triggered the massive crash and bank run.
The LUNAUSDT price fell 99.8% over the past week as the algorithmic stablecoin lost its peg to the US dollar, triggering a flood of withdrawals that threatened the token’s very existence.
However, we cannot talk about Luna without mentioning its sister coin, TerraUSD (UST), which has crashed with Terra since the two coins are inextricably linked. The two coins are linked, encouraging investors to burn one coin while minting the other via arbitrage.
Investors can burn UST tokens to reduce their supply and create more Luna to maintain their USD. However, the latest death spiral was triggered by an $85 million UST transfer from the Terra blockchain to the Ethereum blockchain via the Wormhole bridge on May 7, 2022.
After a significant amount of UST left the network, Terra stakeholders had to mint a lot of Luna to repace the UST, but they could not keep up with the large amounts of UST leaving the network. Hence, the death spiral continued up to the current dire situation.
Another twist to this story is the Anchor savings protocol that guaranteed investors annual returns of about 19% for locking their UST and Luna tokens. However, many have faulted the high returns offered by the stablecoins, given that US government bonds have some of the lowest rates of return.
A token that tracks the US dollar’s value on a 1:1 basis has no business offering investors an almost 20% return, but this is precisely what Terra Labs, the company behind Luna and UST, offered investors.
Many investors knew that the high returns were not sustainable as Terra Labs had to put money into the program to maintain the high returns. However, the company explained that it was doing this to attract investors and that the rate would fall over time.
Luna and UST’s massive implosion is not unique. Many other algorithmic stablecoins have failed, with the most famous being the titan token that lost investors over $2 billion in June 2021, including Mark Cuban.
Many crypto investors could not resist the high returns offered by Luna and UST, which had almost $15 billion in total locked value at one time. Unfortunately, many people who had locked their UST have suffered massive losses, with some losing their entire life savings in the latest crash.
It seems like this is the end of the road for UST and Luna since there is little chance that the two tokens shall recover if history is anything to go by. Investors should learn a lesson from this debacle and steer away from algorithmic stable coins.
*This is not investment advice. Always do your due diligence before making investment decisions.
LUNA/USDT daily price chart.
The LUNAUSDT price chart has fallen 99.8% in the past week and seems to be headed lower.