What caused LUNA's plunge from $119 to nearly zero?

Recently, the price of LUNA currency, known as "Maotai" in the coin circle, dropped from nearly $100 to four decimal places in less than a week, almost "zero", and the market value of $41 billion has almost "evaporated", leaving many virtual currency speculators with no money back.

As of 13:00 on May 17, the price of LUNA, which has climbed as high as $119.5, was down to $0.0001828.

As for LUNA's plunge, Zhao Changpeng, CEO of Binan, posted on social media that, unlike traditional finance, even "big players" like himself may eventually be burdened by the cryptocurrency industry. The lesson is that "we can handle our risks, and you have to manage yours."

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What is LUNA money? "Algorithmic stabilization of currency value" has been implemented in South Korea and Mongolia

LUNA is a virtual coin created by The Terra Blockchain project, founded by South Korean Do Kwon in 2018. The price of LUNA has fluctuated within the $1 range for two years since its launch. However, the price of the virtual coin skyrocketed during 2021, reaching a peak of $119.5 and a peak market value of $41 billion (about 270 billion yuan), ranking fifth among all cryptocurrencies, thus earning it the nickname of "Moutai in the coin circle".

It should be noted that in addition to LUNA, the Terra Blockchain project has also issued a staboin project called UST, which states that each UST is worth $1, while LUNA can be exchanged with the staboin UST.

Guosheng Securities analyzed in the research report that in the exchange process of dual-currency system, in order to make LUNA rise, LUNA must be destroyed and UST must be created. In this process, UST must have use scenarios. At this time, The second largest payment group in South Korea invested endorsement and made stable coins for consumption and payment scenarios. There are also actual e-commerce landing scenes in Mongolia, South Korea and other countries, and the daily activity can reach more than 100,000, which is already very good in the field of blockchain, but compared with the latter, it is still tepid. Only $20 million to $40 million by the end of 2020."

In order to make stabecoin UST more popular, Terra has launched the deposit application Anchor, which gives users an annualized return of 19.5% if they deposit UST on it. This financial product has attracted a lot of pledges, and some investors even want to deposit UST by leveraging up. In the end, thanks to Terra's promotion efforts, UST became the new darling of the coin community, growing into the third largest stable currency after USDT and USDC, and LUNA's price also rose.

Because UST and LUNA can be exchanged for each other, there are many arbitrageurs in the market, allowing the two virtual coins to take off in price. In fact, Anchor's nearly 20% annualized return has been suspected of being a Ponzi scheme.

One design flaw, says Mr Zhao, is that minting money (printing money) does not create value, it only dilutes existing holders, and incentives do not create value, but serve only as a guiding mechanism.

Still, with UST and LUNA prices holding up, the skepticism hasn't discouraged investors. Shell Financial reporters looked at the price fluctuation curve of LUNA currency and found that the price of LUNA currency went up all the way in 2021. Although there was a sharp drop at the end of January 2022, the price soon pulled up again and climbed to $116.41 at 8:00 on April 4, 2022. It is known that the price peaked at $119.5.

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Chart said: LUNA currency nearly a month trend

However, due to the high yield of Anchor, most UST in the market has been stored inside and lost its liquidity. This also sets the stage for the seemingly booming LUNA currency to explode.

A $84 million order triggered a slump, countries strengthen supervision

It should be noted that as an algorithmic stabler, the UST price should always be maintained at $1 to give investors greater confidence.

Terra withdrew $150 million UST in the early hours of May 8 to deploy a new liquidity pool, even as the cryptocurrency market as a whole was in a bear market, making LUNA's already "shaky foundation" even more vulnerable. According to multiple data, only $300 million is needed to drain the liquidity of UST.

In fact, just 10 minutes after the $150 million UST was withdrawn, a sudden $84 million UST was dumped from a new address, seriously affecting the balance of the liquidity pool. At this time, some investors began to change UST into other stable coins on the chain, gradually forming a selling. As multiple accounts began to sell UST at the level of millions of dollars, panic began to spread among investors.

On May 8th, as the price of UST was 95 cents and then returned to less than $1, the information of "UST unanchoring" continued to ferment through market communication, and investors immediately responded and began to sell UST on a large scale. As more and more LUNA was issued to push the price of UST to $1, the price fell, but the UST was drifting away from its anchor. On May 11, UST, which was supposed to be anchored at the value of the dollar, hit a record low of 26 cents, a 44 percent plunge in 24 hours. Investors were even more terrified and had a crisis of confidence in Terra, dumping UST and LUNA, and the situation spiraled out of control.

As of 13:00 on May 17, the price of LUNA was just $0.0001828.

For the LUNA currency slump, Guosheng Securities analysis believes that LUNA nominally has 40 billion circulation market value, but the actual real circulation disk is very few, 70% of the currency is locked in the node to do verification. It is estimated that only 20% of the market flows, and tens of billions of market value is supported by the 20% circulation. "The exchange mechanism between LUNA and UST makes LUNA cheaper and cheaper after issuance, leading to LUNA's super inflation, which is equivalent to making LUNA holders pay for UST holders. However, the number of UST's was so large that the total number of LUNA's expanded from 700 million to several trillion, and the more it fell, the worse the panic became. Finally, both sides lost control."

The LUNA crash has left many investors with heavy losses. One investor posted on social media that he had lost $450,000 in the crash: "I can't pay my bank and will soon be homeless." Do Kwon, the founder of the company, said, I am determined to work with everyone to overcome this crisis and find a way to save myself. So far, however, he hasn't come up with a viable way to save LUNA.

Ash WSB, who has been trading virtual coins since 2007, wrote: "Please don't buy a virtual coin just because someone has posted on a social media platform." Do your own research before investing in anything. You are the one pressing the buy and sell button.

LUNA slump in the currency has also sparked countries for particular virtual currency speculation, such as the us Treasury secretary, yellen on Capitol hill in recent meeting talked about the regulation of encryption market stable currency, yellen thinks, stable against the dollar coin regulatory legislation is imminent, "this area is growing fast, and then lead to huge risks, as is known to all, UST experienced a fall."

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