Last week’s Luna crypto crash saw the cryptocurrency Terra Luna plummet to new lows, falling so drastically in price that its stablecoin, TerraUSD (UST) lost its peg. At the time of publication, Luna’s price has dropped 99.9% and is currently sitting at $0.00024. UST is down 85% at $0.14. With this crash has come talk of Luna being delisted as well. So, while a recovery plan for the Terra Luna crash is in the works and even talk of a Luna fork, what caused the price of Luna and TerraUSD to crash in the first place?

What Happened To Terra Luna?

Luna’s crypto crash stems from its link to TerraUSD (UST), the Terra ecosystem’s algorithmic stablecoin. UST is an algorithmic stablecoin and is operated through computer code that helps keep its price balanced. The process involves burning or minting LUNA/UST to maintain the price of the token. When UST is minted, $1 of Luna is burned, while the reverse is also true for Luna minting and UST burning. As UST threatens to fall below its peg, holders will sell their UST (or burn it) for $1 of Luna, making a small profit. This is until UST rises above $1, when the reverse impulse occurs. After a large amount of UST is dumped, the stablecoin begins to fall. More UST is sold in a mass panic, minting more Luna and increasing the circulating supply of Luna. This has a knock-on effect that then crashes the price of Luna. This circulating supply inflation has increased drastically since the crash. Previously, the circulating supply was around 345 million Luna. As of May 12, it was 3.47 billion Luna, according to analytics data. As of May 13, it is now at 6.5 trillion Luna, where it has remained ever since. Luna Foundation Guard (LFG) has been buying Bitcoin to save UST from depegging. However, the practice has not worked amidst the gradual crypto crisis. Along with this issue, several crypto exchanges such as Binance have delisted Luna and UST pairs. Trading suspensions were also common towards the end of the week. Do Kwon Luna published a recovery plan for Luna, which seemed to have a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below $1 once again. It has since plummeted below 1 cent. However, entering May 16, Luna has seen a gradual price increase from a low of $0.0000009 to $0.0002. That is a drop of 18.5% in 24 hours - a fairly stable day compared to the 99% crash. Similarly, its market cap has returned to the billions of dollars, after dropping to a low of $58 million. At the time of publication, Luna is the 49th largest cryptocurrency by market cap - previously dropping out of the top 1000.

What actually caused UST and the Terra stablecoin Terra to crash?

Whether it was collusion between large hedge funds or something else, someone appears to have bought around $1 billion worth of the UST stablecoin, while shorting their Bitcoin holdings. Massive withdrawals were made from Anchor, a decentralized finance (DeFi) protocol based on the Terra network. Deposits dropped from $14 billion to $11.2 billion in just one weekend. The prevailing negative market sentiment combined with fresh FUD — fear, uncertainty, and doubt — created the perfect conditions for a bunk run — people rushed to pull their money out. As the price of the UST stablecoin dropped due to the dramatic drop in demand, so did the value of LUNA, causing UST to eventually lose its peg. The way the attack was orchestrated is being compared by many to the bets George Soros made against the British pound in the early 1990s. One estimate puts the rug pull at over $800 million. As it stands, no one knows the true perpetrators of this attack.

Luna's Impact on the Crypto Market

The Terra Luna crash appears to be both a symptom and a trigger for several of these major cryptocurrency price declines. After The Luna Foundation Guard and Do Kwon purchased around $3 billion worth of BTC, the success of the Terra ecosystem became more intertwined with the broader cryptocurrency market via Bitcoin. With LFG and other market makers having to sell these Bitcoin reserves in an attempt to stop the UST depegging, this had a ripple effect on the broader market, seeing Bitcoin fall below the $30,000 mark. However, the crypto market now appears to be bouncing back, with Bitcoin back up to $30,000 and Ethereum back above $2000. Nevertheless, the cryptocurrency community remains shaken by the collapse of UST and Luna, adding to an already uncertain period.