The price of LUNA has dropped by 88 percent since its all-time high on April 5th. Investors have lost faith in Terra’s long-term viability, exposing major issues with its stablecoin UST and native token LUNA.
Terra has dropped to its lowest price in over a year following the revelation of fundamental issues with its UST stablecoin. It comprises the complete integration of UST and LUNA in order to provide LUNA holders with unsustainable high staking rewards.
Terra’s techniques for maintaining the value of its stablecoin proves to be deceptive. As a result, large-scale investors pulled out of the LUNA segment. Terra now ranks 69th on the stock exchange. It was, nonetheless, among the Top-10 cryptocurrencies for several months prior to the crash.
Terra’s demise is also making headlines and sparking debate on social media. Crypto aficionados are extremely concerned about the recent market failure of one of the apparently trustworthy crypto ventures.
According to Santiment, a blockchain analytics startup, LUNA has reached an all-time high in unfavorable sentiment on social media. At the same time, Terra-related talks now account for 10% of all crypto debates. It shows that there is a lot of debate in the crypto world about the consequences of LUNA’s failure.
The majority of investors and traders are negative about Terra’s future market potential.
Reasons for Collapse
Terra’s eventual demise was unavoidable for various reasons, according to a detailed examination of its market performance.
First, by combining LUNA tokens with the UST stablecoin and delivering unjustifiably large staking rewards, demand for LUNA tokens artificially maintains. While such tactics boosted LUNA’s short-term demand, they jeopardized the company’s long-term viability.
Second, its algorithms were not based on long-term crypto or fiat reserve buildup. As a result, Terra may look unable to sustain its peg with the US dollar when increased market demand arises.
Third, according to Larry Cermak, the Luna Foundation’s $1 billion financing plan has failed. The reason for this is because the Foundation was unable to raise the necessary finances to fund its objectives. Furthermore, the panic exposed the stablecoin model’s significant flaws.
Fourth, once the UST lost parity with the US dollar, Terra’s management chose to sell all of its BTC holdings. As a result, the stablecoin has lost a significant portion of its cryptocurrency backing. Furthermore, the lack of suitable blockchain tasks performed by LUNA caused the token’s demand to plummet.
Terra’s demise has significant ramifications for LUNA, the algorithmic stablecoins area, and the broader crypto economy. Terra’s Top-10 positions in relation to its UST stablecoin and native token LUNA are unlikely to be restored. It won’t be able to keep up its unsustainable market expansion strategy.
Furthermore, the tarnished image may be a significant barrier to obtaining new investors. In the foreseeable future, investors are most likely to migrate to more sustainable crypto models.
Because of the heightened concerns of market players, algorithmic stablecoins may face extra pressure in the short term. They can successfully satisfy demand for their services regardless of short-term aberrations if they rely on sustainable algorithms (for example, DAI’s approach to stablecoins).
As a result, the algorithmic stablecoin component can alter in response to growing user concerns. At the same time, the most long-term stablecoins should be able to overcome these difficulties.
In terms of the entire crypto industry, the current trend of rapid proliferation of various types of stablecoins could alter. Investors and holders are aware of the dangers involved and do not consider them to be risk-free investments. Furthermore, they may become increasingly reliant on their collateral or strategies for preserving pricing stability.
In the short term, the general demand for cryptocurrencies may also fall slightly. Investors may begin to enter the market if the existing dangers are reassessed, resulting in a rapid rebound in the months ahead.