300 Billion Market Capitalization Cleared Overnight to Read The Ins and Outs of The LUNA Crash

It takes 44 days to fall from 100 to 1 dollar in the stock market, but it only takes 48 hours to clear the currency circle. On May 9th, the digital currency LUNA plummeted and caused the currency circle earthquake. LUNA coins fell all the way from US $90 to 5 zeros below the decimal point directly . By the way, it also brought down all the digital currency markets and became headlines in various countries. In this industry earthquake, some people became rich overnight, but more people lost their money, and some currency speculators could not bear the huge blow and chose to commit suicide. Next, let’s sort out the ins and outs of the whole incident and talk about the enlightenment of this incident.

1. What is stable currency?

Before talking about LUNA coins, we need to clarify a concept: stable coin. With the development of the currency circle, digital currency, as a commodity or a medium of exchange, needs a pricing standard that everyone recognizes, that is, everyone needs to recognize its value, which is the so-called stable coin. At present, the most mainstream stable currencies in the market are USDT and USDC, which are issued by Tether and Circle respectively. They all claim that their cryptocurrency are equivalent to US $1. So the question is, why do you believe that his cryptocurrency can be equivalent to $1? The two companies did this. They chose to use physical assets as collateral. The two companies claimed that each stable currency issued would have a corresponding dollar of assets as reserves, and regularly publicized reserves for everyone’s supervision. Take USDT as an example. There are 73.2 billion USDT in circulation in the market now, that is, in theory, Tether should have a reserve of 73.2 billion US dollars to protect its value. But does Tether really have 73.2 billion US dollars in the bank?

2. How did LUNA start?

Our protagonist, the Korean Do Kwon, was thinking how can he make people believe his LUNA currency without a huge amount of money to support it, and what to compare it with the ready-made stable currency? So he thought that he might as well make a stable coin without guarantee, so Terra Ecology and LUNA currency were born. He first invented a stable coin called UST, which we can understand as US dollars, and then issued a cryptocurrency called LUNA. Terra uses LUNA to achieve its stability.

3. Operational mechanism of LUNA

Terra invented a two-way destruction mechanism and formulated three rules on this mechanism. First, 1 US dollar LUNA is equal to 1 UST; Second, anyone can exchange 1 UST for 1 US dollar LUNA or LUNA for 1 US dollar UST; Third, UST can only be generated by LUNA exchange and will not appear out of nowhere. In order to make LUNA and UST equivalent, Do Kwon issued a large amount of coins. He created an agreement called Anchor, in layman’s terms, UST’s time deposit contract. You only need to deposit UST in it for a year and do nothing to earn 20% interest. Compared with the possibility of losing everything overnight, it is really attractive to make 20% lying down. In order to increase LUNA’s liquidity, users only need to mortgage ETH or LUNA to borrow UST at low or even negative interest rates. This stimulates user demand for LUNA, leading to a surge in LUNA prices. As a result, LUNA’s market value once exceeded US $43 billion. UST has also become the third largest stable coin after USDT and USDC.

4.LUNA vulnerability appears.

The opaque UST is a huge loophole, and in the eyes of anyone as a Ponzi scheme to cheat money, why would anyone else want to buy it? Everyone wanted to walk away with the principal and 20% interest before this bubble disappeared, but LUNA didn’t even leave a chance to get everyone back their principal. UST and the dollar, a mutually convertible mechanism, doomed it to an end. If UST is below $1 for a long time, the result is this crash. Since the UST is less than US $1 for a long time, everyone will replace the UST in their hands with LUNA. The sharp increase in the number of LUNA will naturally lead to a cliff-like decline in the coin’s price. UST for LUNA actually is a $1 LUNA. As long as UST does not return to $1, there will be people who will constantly exchange UST for LUNA to sell, and the more LUNA falls, the more it can sell, increasing the chances of its collapse. And Anchor’s website shows that they have to pay $4 million a day to support the interest of this 20%. And their liquidity is only enough for them to last until June, and the crash is only a matter of time.

The collapse of LUNA is not only a major event in the cryptocurrency market, but also affects the real life of many players. Some people even went bankrupt and took the whole family to choose suicide. But before this happens, everything is traceable. Hopefully Do Kwon gets the punishment he deserves.