Terra (LUNA) and Its Stablecoin: A Turbulent Saga in the Crypto World 👀

In 2023, the crypto community still grapples with the aftermath of one of the most dramatic episodes in cryptocurrency history – the collapse of TerraUSD (UST) and its sister token LUNA. This event, occurring in May 2022, serves as a stark reminder of the volatility and unpredictability inherent in the crypto space.

The Rise and Fall of Terra 📈📉

Terra, founded in 2018 by Daniel Shin and Do Kwon, was built on the Cosmos SDK and employed a dual token model: TerraUSD (UST), an algorithmic stablecoin pegged to the US dollar, and LUNA, a governance token to stabilize UST's peg. LUNA was instrumental in maintaining UST's peg by absorbing volatility and was burned to mint new UST tokens​​.

In 2021, Terra's ecosystem, boosted by high yields on UST deposits offered by Anchor Protocol, saw a meteoric rise. UST's supply surged, and LUNA's price skyrocketed, making Terra a top 10 cryptocurrency. However, this growth was unsustainable, largely propelled by high yields subsidized by the Luna Foundation Guard (LFG) using external capital injections​​.

The Catastrophic Depegging

The crisis unfolded when UST lost its dollar peg in May 2022. This led to a negative feedback loop, exacerbated by arbitrage traders. As UST’s value declined, more LUNA was minted to maintain the peg, severely diluting its value. Within a week, both UST and LUNA's values plummeted, erasing over $60 billion in value​​.

Efforts at Rebuilding

Following the disaster, Terraform Labs proposed a revival plan through a new Terra 2.0 chain, issuing new LUNA tokens to previous holders. This move, however, was controversial and faced criticism for favoring certain stakeholders over others. The long-term viability of this new iteration of LUNA remains uncertain​​.