Luna UST Death Spiral: Is It Time for Terra to Accept Its Demise?
The collapse of Terra's UST stablecoin and governance token LUNA has been one of the biggest stories in crypto history. Amid the craziest week in crypto ever, many are asking: is this the end for Terra? The rapid descent, fueled by a devastating death spiral, leaves the future uncertain.
Understanding the Luna UST Death Spiral
The “death spiral” effectively occurred to LUNA-UST in May 2022. The mechanism designed to maintain UST's peg to the US dollar ultimately backfired spectacularly. Social media sources relate its origin to a “coordinated attack,” in which market actors strategically destabilized the ecosystem, causing both UST and LUNA to crash.
Death Spiral Risk: How it Unfolded
When UST lost its peg, users could burn UST to mint LUNA. This led to LUNA hyperinflation, causing its price to plummet and further destabilizing the entire system. This created a vicious cycle – a true death spiral.
LUNA Hyperinflation: An Unprecedented Increase in Supply
The supply of LUNA has only been ballooning up of late. Yesterday, around this time, over 1.46 billion tokens were in circulation. However, during the early hours of Friday, the number was already up to 6.5 trillion. Meanwhile, the token lost more than 99% of its value and was worth merely fractions of a cent at press time. Alongside, the price of UST plummeted as well.
The Aftermath: Where are UST and LUNA Now?
As of now, UST is worth only a few cents, and Luna is worth fractions of a cent. The interconnectedness of UST and LUNA meant that their fates were intertwined. Their activity caused the linked currency Luna to also crash in what is known as a “death spiral.”
Is There a Future for Terra?
The road ahead for Terra is incredibly challenging. The sheer scale of the losses and the damage to investor confidence make a full recovery seem unlikely. Whether Terra can rebuild trust and find a viable path forward remains to be seen. The LUNA UST death spiral serves as a stark reminder of the risks associated with algorithmic stablecoins and the importance of robust security measures in the decentralized finance (DeFi) space. Amid the crash, LUNA...