Terra Death Spiral Hits $3 As Bailout Rumors Fade
Crypto Briefing | May 11, 2022 06:54AM ET
The LUNA token has fallen 90% in the last 24 hours. Terra has continued to collapse as the blockchain’s UST stablecoin has failed to regain its dollar peg. Rumors that a venture capital-backed bailout has fallen through have added increased downward pressure on LUNA’s price. The Terra ecosystem is falling apart.
The Layer 1 blockchain’s LUNA token has fallen an additional 90% in the last 24 hours as selling pressure reached unprecedented levels.
Terra’s algorithmic UST stablecoin has also drifted further from its dollar peg, briefly sweeping lows of $0.30 before posting a slight recovery. At time of writing, LUNA is currently trading just above $3, down over 96% this week alone.
Efforts to restore UST’s dollar peg have severely impacted LUNA’s price. UST aims to keep its peg algorithmically by letting anyone swap 1 UST for $1 worth of LUNA tokens.
Normally, this algorithmic relationship would incentivize arbitrageurs to extract value from the difference in price between UST and U.S. dollars, helping it hold a price of around $1.
Terra’s dual token mechanism usually keeps UST within 1% of its expected dollar value. However, when UST falls significantly below its dollar peg, the algorithmic relationship produces more LUNA tokens that arbitrageurs need to sell on the open market to profit from their trades.
If UST’s peg is not restored, the influx of LUNA tokens can create a death spiral that continually drives its price lower until UST’s peg is restored.
Get The News You Want
In response to LUNA’s meteoric decline, Terraform Labs CEO Do Kwon took to Twitter Wednesday to address the community and outline the company’s next move.
“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it,” Kwon stated, referring to the imbalance between the circulating supply of UST and the diminished market cap of LUNA.
To help speed up the process of reducing the UST supply below the market cap of LUNA, Kwon has endorsed a new community proposal that will increase UST burning and LUNA minting capacity from the current rate of $293 million to $1.2 billion.
LUNA is not the only Terra ecosystem token to suffer extreme losses over the past 24 hours. The tokens of top Terra DeFi protocols such as Anchor and Astroport have also respectively plummeted by 72.3% and 81.6%.
According to blockchain data platform DeFi Llama , the total value locked in Terra DeFi protocols has dropped more than 87% from $29.65 billion on May 5 to $3.75 billion today.
Yesterday, Terra’s LUNA token appeared to have stabilized around $30 as rumors of a bailout circulated on social media. According to Larry Cermak, Vice President of Research at The Block, several venture capital firms, including Jump Capital and Alameda Research, were rumored to provide $2 billion to “bail out” UST and help it regain its dollar peg.
However, a more recentTwitter post from crypto researcher mhonkasalo indicates that the fundraising may have fallen apart. Whether this rumor is true is not yet confirmed.
Still, in light of LUNA’s continued breakdown and confidence in UST waning, it seems likely that previous backers are getting cold feet when asked to invest even more money to help prop up the Terra ecosystem.
Original Post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.