Key takeaways

1. It’s claimed that the digital currency market lost $60 billion when the luna crypto network crashed.
2. Unlike Tether or USD Coin, which are backed by real money or assets kept in a bank, algorithmic stablecoins (UST) are not the same.
3. Do Kwon, the co-founder of Terraform Labs, the company that housed the sister coins Luna and TerraUSD, has an arrest order out for him.

Over the course of four years, Do Kwon, the leader of Terra Network, climbed to fame in the cryptocurrency industry, only to have a devastating fall from grace. With an estimated $60 billion in losses, the luna crypto currency network crashed in what is regarded as the worst crypto meltdown ever, rocking the world’s digital currency market.

The Terra USD/UST stablecoin and the genuine Luna coin are the two tales associated with luna crypto currency. There was a severe shortage of liquidity in the cryptocurrency market following the crashes of Luna and UST, which resulted in an even more disastrous loss of value. The cryptocurrency world hasn’t fully recovered yet.

What is luna crypto exactly?

Here’s a little explanation of TerraUSD and Luna, which you may be familiar with. The Luna network has a lot of moving pieces before it collapses.

On the same network, TerraUSD (often referred to as UST) and Luna are sister coins.

Like Ethereum or Bitcoin, Terra is a blockchain network that generates Luna tokens. Terraform Labs’ Do Kwon and Daniel Shin founded the network in 2018.

The UST coin was developed by Terraform Labs to function as an algorithmic stablecoin on the Terra network. The UST would not be backed by actual assets, in contrast to other stablecoins like USDC or Tether, which are backed by money. Rather, the value of UST would be supported by Luna, its sibling token. Later, more on that.

Because stablecoins are designed to have a set value of around one dollar, they are purportedly safe havens in the cryptocurrency sector. The intention is to provide investors with a reliable store of wealth in contrast to other erratic currencies (like Ethereum).

Like ether on the Ethereum network, Luna was Terra’s native blockchain coin. Four parts were played by Luna on the Terra network:

1. A way to pay the Terra network’s transaction costs.
2. A system for preserving the stablecoin peg on Terra.
3. staking to validate network transactions using Terra’s delegated proof of stake (DPoS).
4. involvement in the platform’s governance via making contributions to and casting votes on suggestions for modifications to the Terra network.

How much was Luna worth?

Prior to being delisted, a Luna coin that was trading for about $116 in April dropped to a penniesy value. Prior to it, the coin’s value increased from less than $1 at the beginning of 2021 to many luna crypto billionaires in less than a year. As a result, Kwon became somewhat of a cult figure among regular cryptocurrency buyers. Numerous success tales of common people becoming wealthy through Luna surfaced in the media.

The Luna token reached its high in April 2022 after surging by over 135% in less than two months. The biggest perk was the opportunity to stake your UST investments for a 20% yearly income on the Anchor lending platform. Numerous observers believed that this ridiculous pace could not continue.

Built on the Terra blockchain, the Anchor Protocol was a decentralized financial marketplace. Because of the previously indicated 20% dividend for UST holders who put their tokens on the platform, this platform gained popularity. Subsequently, Anchor would lend the money to an additional investor. Where the funds to pay these rates came from worried a lot of doubters. Some said this was very evident Ponzi scam. Since the platform was the main source of demand for Terra, up to 72% of UST was once placed in Anchor.

What happened to UST?

Let’s take a quick look at stablecoins before we examine this cryptocurrency catastrophe. Stablecoins are backed by more reliable currencies, such as the US dollar. Both USDC and Tether are dependent on the USD. In order to protect against market volatility, stablecoins are utilized. As an illustration, suppose Ether costs $1,000. One Ether might be traded for one thousand USDC tokens. Stablecoins are a good option for investors who want to hedge their assets against potential drops in the cryptocurrency market.

The UST coin was supported by an algorithmic stablecoin rather than a real US dollar. It was thought that Terraform Labs might sustain the UST peg without the USD’s support by using cunning procedures and reserves worth billions of Bitcoin.

You must burn luna crypto in order to make UST. Thus, you may exchange one token for 85 UST, for instance, when the price of the Luna token was $85. The purpose of this deflationary technique was to guarantee Luna’s long-term growth.

One UST could always be exchanged for one Luna at a time in order for UST to maintain its peg. Traders may profit from purchasing UST and then selling it for Luna if UST dropped.

After UST lost its peg to the dollar, which made it a stablecoin, both Luna and UST fell.

Because it wasn’t backed by cash, treasuries, or other conventional assets like the well-known stablecoin tether, TerraUSD was dangerous. The algorithms that connected the value to Luna produced the stability of UST. A lot of specialists didn’t think an algorithm could maintain the stability of two tokens.

Why did LUNA crash?

Because of its link to TerraUSD (UST), the algorithmic stablecoin of the Terra network, the luna crypto currency crashed.

UST valued at more than $2 billion was unstaked (removed from the Anchor Protocol) on May 7, and hundreds of millions of them were promptly liquidated. Whether this was a result of increased interest rates or a malevolent attack on the Terra blockchain is up for dispute. The massive sell-offs reduced the price of UST from $1 to $0.91. Traders began exchanging 90 cents worth of UST for $1 of Luna as a result.

After a significant quantity of UST was offloaded, the stablecoin began to depreciate. More UST were sold off in a panic, which increased the amount of Luna that was in circulation and caused more Luna to be minted.

Crypto exchanges began delisting Luna and UST pairs after this crash. To cut a long tale short, Luna was abandoned because it was losing value.

What happened after the Luna crash?

The whole cryptocurrency market, which at the time was already rather unstable and had problems, was affected by the Luna breakdown. According to estimates, the Luna collapse destroyed the value of the whole cryptocurrency market, plunging the price of bitcoin to an all-time low.

Leaders in cryptocurrency Voyager and Celsius declared bankruptcy. Liquidation of Three Arrows Capital (3AC) was compelled.

The luna crypto currency crisis caused financial troubles and the loss of many people’s life savings. Many of these horrific tales may be found online with a little search. Known as “Lunatics,” a large number of devoted Luna admirers shared their terrible tales in Reddit threads. A retail cryptocurrency trader even acknowledged that they had lost their $20,000 in savings in Luna.

Those who left their posts before to the crash emerged as the sole winners. We must single out the hedge firm Pantera Capital as a winner. On a $1.7 million original investment, they received a 100x return. Before the bankruptcy, the business sold its Luna holding for a $171 million profit.

What happened to the luna crypto founder?

After the initial incident in May, Do Kwon presented a rehabilitation plan for Luna, and things appeared to be improving for a while. But in the end, the coin fell. It was quickly given up on. In the end, Terra introduced Luna 2.0, a new currency.

It was revealed on September 15 that Do Kwon had an arrest warrant issued by a South Korean court. This occurred over four months following the demise of Terraform Labs’ two tokens, UST and Luna. Do Kwon and five other individuals are presently facing charges of breaking local market regulations.

Kwon’s passport is being sought to be revoked by South Korean officials because they think he is presently living in Singapore. Theoretically, Kwon would have to travel back to South Korea within 14 days after being notified of the revocation if this legal case is successful. The request is still being assessed by the ministry.

A few investors who suffered financial losses on Luna have complained to the local prosecution, alleging that Kwon committed fraud and unlawful fundraising. An estimated 280,000 South Koreans made financial investments in Luna.

How should you be investing?

Consider purchasing an investing kit like our Crypto Kit or Emerging Tech Kit if you’re wanting to make cryptocurrency investments. By investing in the whole ecosystem rather than just one currency or business, both kits assist in distributing risk across several industries. Each week, they both divide up the portfolio weights across the four vertices of luna crypto currency, tech ETFs, big tech businesses, and small tech companies using AI. Regardless of the industry they invest in, users may activate Portfolio Protection at any moment to safeguard their earnings and minimize their losses.

The bottom line

You have to acknowledge that investing in digital currency and other assets that are prone to extreme volatility carries a significant risk. Hopefully, rather than marking the beginning of an age, this catastrophic collapse of luna crypto is more of a passing, black swan occurrence. The most important lesson to learn is that, in most cases, investments that appear too good to be true are. Second, it would be wise for investors to keep their cryptocurrency holdings to no more than 5–10% of their whole portfolio if they are still enthusiastic about the long run.