The Terra Crisis
Understanding of Terra Blockchain, pegging mechanisms, its downfall, and next steps.
“95% of the total cryptocurrency market is going to die. It’s also very entertaining to watch those projects die.”
- Do Kwon
What is Terra?
Terra is a Cosmos-SDK based blockchain that utilizes Tendermint Core and was founded by Do Kwon, who also helped create ICON (ICX), one of the largest cryptocurrency projects in South Korea. The Terra team launched their mainnet in March 2019.
Terra aimed to provide a decentralized payments network for cross-border commerce. The Terra Protocol uses a native token, Terra Luna, to collateralize a stable coin called TerraUSD. TerraUSD is pegged to a basket of fiat currencies and backed by Terra Luna.
What is Luna & TerraUSD?
Luna and TerraUSD (UST) are both native tokens of the Terra Blockchain built on Cosmos SDK.
UST is pegged to the US dollar, which means one UST is supposed to always be worth around the same price as one dollar. Luna plays a vital role in keeping this balance.
Stable coins usually depend on reserves to maintain their peg. This means they (theoretically) have their assets locked in an escrow account which values or devalues their asset based on the currency fluctuation. Simply put, for each stable USD for example, there will be an actual USD kept in escrow. (This happens only in theory).
However, UST is an algorithmically stabilized coin that uses a smart contract-based algorithm to keep the price of UST anchored to $1 by burning Luna tokens in order to mint new UST tokens.
Terra Blockchain validators vote to mint new TerraUSD when the community believes that the price of TerraUSD has risen above its peg, and they vote to destroy TerraUSD when they believe that the prices have fallen too low.
Why did Luna & UST Crash?
The attack of whales on Terra
Between May 7 & 8, Luna/UST pair dropped 20%, its lowest in 3 months after a whale dumped $285M worth of UST. As…