Terra (LUNA) Collapses by Over 95%
Terra (LUNA) continued its collapse as the blockchain's stablecoin UST failed to regain its US dollar peg.
Rumors that the venture-backed bailout had fallen through added to the downward pressure on LUNA’s price.
Terra’s ecosystem is crumbling
LUNA token has fallen more than 90% in the past 24 hours as selling pressure reached unprecedented levels. Terra’s algorithmic stablecoin also drifted further from its peg to the dollar, briefly falling to a low of $0.29 before slightly recovering.
UST’s efforts to regain its dollar peg have had a serious impact on the price of LUNA. The stablecoin aims to maintain its 1:1 value to USD algorithmically by allowing anyone to exchange 1 UST for $1 worth of LUNA tokens.
Normally, this algorithmic link would incentivize arbitrageurs to extract value from the price difference between UST and USD, helping it maintain a price of around $1.
Terra’s two-token mechanism typically keeps UST within 1% of the expected dollar value. However, when the UST falls significantly below its dollar peg, the algorithmic link produces more LUNA tokens, which arbitrageurs must sell on the open market to profit from their trades. If the UST peg is not restored, the inflow of LUNA tokens can create an effect that continually drives down the price until the UST peg is restored.
LUNA is not the only token on the Terra ecosystem to suffer extreme losses in the last 24 hours. The tokens of Terra’s top DeFi protocols such as Anchor and Astroport have also fallen by 72% and 81%, respectively. According to blockchain data platform DeFi Llama, the total value locked in Terra’s DeFi protocols has dropped by more than 87% from $29.6 billion on May 5 to $2.8 billion today.
A recent Twitter post by crypto researcher “mhonkasalo” indicates that fundraising to save LUNA and UST may have failed. It has not yet been confirmed if this rumor is true. Still, given LUNA’s ongoing collapse and declining confidence in UST, it seems likely that we’ll see worsening sentiments toward the project.