Luna Crypto: Rising From The Ashes

Last week, the Terra Luna's crash (UST dip from less than $1, and LUNA has also lost 99.9% of its value) shocked the investors in the crypto arena. This Crash was no less than a black swan event which is similar to the financial crisis of 2008 or market contraction during the beginning of the pandemic.

This black swan event is very attached to its positive changes like overhauling the algorithm of stable coins rather than emerging negative sentiments, and these events are necessary for putting some robust system in place.

The Luna crash has also brought doubts about the terra ecosystem and whether the terra Luna will gain the momentum once again or not, these all questions are looming among the investors. So to demystify all doubts let’s get into more detail about the Luna crash.

Terra Ecosystem

According to reports, the Terra ecosystem has shown impeccable growth with UST market capitalization from $180 million in 2021 to approximately $15 billion in march 2022,meanwhile LUNA’s price crossed 138 times in the same period. The three parameters that defines the achievement of this ecosystem are as follows :-

1. Purpose of Terra ecosystem —?It is built to enable peer -to-peer electronic cash payment systems around the globe , it fetches the transaction fees below 1% of transferred amount which is far better than compared to other credit cards companies and payment companies. The projects built on this ecosystem is more than 100 which includes Non-fungible tokens (NFTs ) , Web3 and decentralized finance.
2. Under the Cosmos SDK —?An open-source structure which allows to build multi -asset public proof of stake(POS) . It is more often known to be?application specific blockchain?because Cosmos SDK has been used to create applications such as Cosmos Hub , IRIS Hub, Binance Chain or Kava and others , this open source structure uses the default consensus engine known as tender mint core.
3. Delegated Proof of stake (Dpos)?— Algorithmically controlled public blockchain protocol that works on delegated proof of stake mechanism or consensus mechanism which adheres to integrity and avoids minting extra coins ,users of this network choose the next block by voting and electing the delegates.

How Terra Ecosystem works-

The terra ecosystem works on these three main components :-

1. Distributed ledger —?Algorithmically governed public blockchain protocol works as a distributed ledger which is accessible by multiple participants and maintained by the network validators.

2 Role of Validators -Validators use to vote on blocks and work under DPOS algorithm, to verify each transaction made on terra network the validators run programme named as “full nodes”. These validators are also responsible for ensuring the accuracy and securing the blockchain.

3. Mining reward and burning of sister tokens-?Luna is bonded with the validators in exchange for getting the stake in rewards , so in order to get the new block the validators with larger stake are chosen to do so and proportionally they get more rewards. Two token coins named Terra stable coins (pegged to USD, EUR, CNY, JPY, GBP, KRW) and its sister coin Luna (crypto asset ) , to mint new Terra UST Lunas are burned or vice versa hence the more terra is used the more Luna is worth.

Terra & Luna work in sync

As discussed earlier , in order to mint Terra UST ,Luna’s are needed to be burnt but what makes these two sister coins work in sync , let’s drive deeper..

Role of Smart contracts

These are singleton objects whose internal state is persisted on the blockchain ,by using these smart contracts algorithms the terra UST prices are anchored at $1 this process invokes the burning of Luna ( permanently blocked ) and gaining of Terra UST. The three main function of terra interface are :

• init():?a constructor which is called during contract instantiation to provide initial state
• handle(): gets called when a user wants to invoke a method on the smart contract
• query():?gets called when a user wants to get data out of a smart contract

Arbitrage Mechanisms

This mechanism fully drives the way to operate the terra ecosystem and one of the traditional financial markets existed long before the induction of crypto markets , the methodology involves the price discrepancies exists in different exchanges for digital assets.

Example — Suppose the value of bitcoin is $ 40,000 on the Coinbase exchange & $40,200 on the Coindcx platform then there is a price difference of $200 , In this case arbitrageurs buy the bitcoin from Coinbase and sell it to the Coindcx.

Demand And Supply

Value of Luna tokens surge as the demand for UST increases ( above $1) because the Luna tokens become scarce(Luna burnt to mint UST) as they left out in a very small number in circulation, on the other hand if demand for UST becomes low ( below $1),holders can now swap the UST tokens with Luna in 1:1 ratio which is valued more due to its scarcity. In this way holders can balance out the demand and supply and can easily earn the risk-free profit.

Maintain stable fees rates

Similar to IMF SDR (International monetary fund Special drawing rights) the Terra Ecosystem have its own SDR which contains the basket of currencies that results in risk aversion and makes the system immune to volatility and sudden unevenness of the market, this is very important part when it comes to grants , rewards and fees rates.

$UST Vs $USDT

Mysteries behind LUNA crash

1. General Reasons

• Due to spike in interest rates of Federal Reserve’s Terra loosen out it peg of $1
• The market sentiments are low due to inflation and so people are moving out from the risky venture.
• Regulators are taking stringent moves against cryptos like making governing laws over the possession of cryptos because investing in crypto is a safe and easy bet .

2. Technical Reasons

• The balancing criteria known as Anchor protocol ( the borrowers are looking to buy more stable assets from stable coin and lenders are looking to gain a stable $ sustainable yield on stable coins ) between Terra UST and Luna.
• Anchor protocol acts as a savings account which pays 20% interest on Terra USD , however according to the reports , In march 2022 , this interest of 20 % replaced with variable interest rates causing this many to have withdrawn from a large amount of Terra USD .
• As per the Wall Street Journal, worried investors prompted the selling of Luna and UST tokens.
• This variable interest rate resolution & sell off caused the surge in supply of Luna tokens and hence resulted in depreciating the value of LUNA and UST.

3. Other Reasons -

• There is large and alleged dumping of LUNA and BTC causes the liquidation.
• This liquidation caused by some large institution has borrowed 100,000 bitcoin from Gemini Exchanges at a discounted rate.
• The liquidation caused the surge in supply of LUNA due to which the prices dropped .

This reason was mention in the tweet of Charles Hoskinson , founder of the Cardano blockchain platform and was a co-founder of the Ethereum blockchain platform

Recovery Plan after Luna crash

After this black swan event Do Kwon cryptocurrency developer who co-founded and is CEO of Singapore-based Terraform Labs comes out with a recovery plan . In his tweet he said

“The Terra ecosystem is one of the most vibrant in the crypto industry, with hundreds of passionate teams building category-defining applications within… Terra’s return to form will be a sight to behold.”

On Monday While announcing the recovery plan he said in the tweets “$UST peg failure is Terra’s DAO hack moment — a chance to rise up anew from the ashes”

In the recovery plan, he emphasized taking the following measures

Reintroduced Tokenomics

The Blockchain network should be reset by the validators through 1 Billion tokens and the Terra community should play a crucial role in reassembling the chain.

1 billion tokens are distributed in the following ways

400billion Unit Tokens — Former Terra Luna holder ( significant depreciation occurred)

400 billion unit Tokens- Distributed to Terra USD holders.

200 billion unit tokens- Distributed among the terra community for upcoming projects in the future and the people who bought the dip in the 11th hour to save the LUNA crash.

Kwon suggested to the community that “incentivize their security with a realistic inflation rate, say 7 percent” because the fees are no more enough to pay security excluding the exchange fees.

Do kwon twitter handle :Luna Revival Plan

Click?here?to know about full revival plan

Terra Luna Future

After the crash, various analytics firms comes into the picture and they have anticipated the following growth forecast of LUNA in the coming days :

1. As per the prediction made by the?Coin price?forecast, at the end of the year 2022, the Luna will close its value at $0.00051078 which is a 176% increase from the current price.
2. As per trading beasts, the speculation made for the year 2022, Luna's price will be $0.0014228 and by the year 2026, Luna will cross 502.6% of the current price.

3. Another analyst firm?Coinpedia?has provided estimates that there will be a strongly bullish price of $142 for LUNA in the year 2022 and in the next five years it will trade around $498.26.

As written by Kenneth Galbraith in a?“A Short History of Financial Euphoria “

“extreme brevity of the financial memory”, the repercussion of which “financial disaster is quickly forgotten”.

The Crypto world is full of leaps and bound and crashing events of some coins like Terra Luna do not mark the permanent impact on the emerging financial system. These events are tied to some fate that comes upfront when they are at the brink, but by continuously evolving these events can be minimized and turn efficient for the masses.