Terra Luna Crypto Crash: Was the Coin a Ponzi?

The crypto market was shaken by the Terra Luna crypto crash or the coin’s meltdown. The coin was launched in 2018, and it made its place in the top 10 investment-worthy crypto coins in a short period.  Many investors rushed to store Terra Luna as an asset. The same Terra community is now on the verge of losing their lives. 

What happened? Is Terra Luna going to recover anytime soon? Let’s find out. 

Background Story Behind Terra Luna Crypto Crash

Terra, like Bitcoin and Ethereum, has its blockchain. Terra and USDT are native tokens of the Luna blockchain. Both of these crypto coins were The virtual coin increased by more than 150% during the last year. From less than half a buck a year ago, it reached an all-time peak of $75.56. 

The UST virtual currency, which is tethered to the US dollar, is Luna’s main offering. Crypto investors use stablecoins as safe zones when marketplaces in DeFi (decentralized finance) get bumpy. 

Instead of changing their highly volatile holdings into actual cash, which can be costly and result in tax issues, traders prefer having their hands on stablecoins in such cases.

As per Coinmarketcap data, the cryptocurrency increased by approximately 12,000 percent year in 2021 than it has ever been. If you had invested $10,000 in the Terra or USDT cryptocurrency on January 1, the overall yeild of your investment would have grown to $12,00,000 by December 8, 2021.

That’s how massive Tera and Luna have been in the past. Then one day, TerraUSD lost its peg, and the stablecoin’s price plummeted to $0.30. It has now recovered some of its value, albeit well below the $1 target. 

What’s the Reason Behind the Terra Luna Crypto Crash?

Regarding the likelihood of a hacking attempt. Some suspect that an intruder tried to breach UST to earn from bitcoin short selling or speculating on its price falling. Depegging UST would require Terra’s staff to liquidate chunks of its bitcoin reserve to repeg the stablecoin if would-be hackers built a significant position in UST and then unstacked $2 billion all at once. Shareholders would hurry to unstack and sell their UST once they realized it had lost its peg, requiring additional bitcoin. 

Is Terra a Ponzi Scheme?

Yes and no. Shareholders have been accumulating UST for the past six months with one clear aim: to profit from a financing system named Anchor, which provided a 20% rate to anyone who bought UST and lent it to the protocol. 

Many detractors instantly compared this possibility to a Ponzi scam, claiming that it would be technically impossible for Terra to pay such a good yield to all of its shareholders. Terra’s team even admitted as much—but compared the charge to an ad spend to create awareness, similar to how Uber and Lyft offered heavily reduced fares at the start of their operations.

The Anchor protocol, for example, was widely appealing to investors since it provided 20% APY on TerraUSD transactions. It is superior to what you’d get from a typical checking account.

Terra recently declared that it would continue blockchain transaction verification but would no longer enable direct transfers across the network. Therefore, individuals are advised to use alternative channels. 

Can Arbitrage Trading Help in the Terra Luna Crypto Crash?

Arbitrage is the synchronized purchase and sale of an item to profit from slight price differences between markets. A built-in arbitrage mechanism keeps Terra stablecoin’s price stable. This is how it goes.

Traders can give one TerraUSD coin to create $1 worth of a Luna, only if the price of TerraUSD decreases to $0.98. The trader gets a $0.02 profit once more, and the arbitrage algorithm recovers the peg, raising TerraUSD’s price by limiting its availability. 

So assumingly, the arbitrage mechanism may control the damage but the poor governance has to be treated with seriousness. 

Are Things Going to be Better for Terra?

There are hardly any chances yet. Since UST depegged, Terra devs have had a challenging time. On Monday, the Luna Foundation Guard stated that its bitcoin holdings had dropped from 80,000 (about $2.2 billion) to just 313 ($9.2 million. 

The governance team will utilize any saved assets to reimburse the remaining UST holders, with the lowest holders receiving priority. However, there were no specifics on how developers would follow the compensation endeavor through.

Many luminaries in the cryptocurrency community have been scrambling to distinguish UST from other stablecoins since last week, saying that reserved cryptocurrencies are safer and should be left to thrive with minimum restrictions. Nobody knows where the future will lead us but the situation is bad now. 

Takeaway

Cryptocurrency markets have been buffeted by a slew of other obstacles, including increasing interest rates and rising inflation, which have triggered a sell-off in global stock markets, which has made its way to the crypto marketplace. The price of digital currencies has been linked to stock market moves.