Terra’s LUNA Has Dropped 99.7% in Under a Week. That’s Good for UST

LUNA tokens lost 96% in the past 24 hours alone, prompting more to be minted in a mechanism that helped lift the UST price.

May 12, 2022 at 9:39 a.m. UTC
Updated May 12, 2022 at 4:38 p.m. UTC

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

Traders of Terra’s LUNA tokens suffered some of their biggest weekly losses in recent months as prices fell 99.7% in a week, data shows.

The LUNA price fell 96% in the past 24 hours alone, pushing it to less than 10 cents. That's down from about $60 earlier this week and a record $120 in mid-April.

LUNA hovers above 10 cents at writing time. (TradingView)

A change in market dynamics caused LUNA prices to snap at a breakneck pace. LUNA plummeted through several support levels as terraUSD (UST), a Terra-issued stablecoin that's meant to be priced 1:1 to the U.S. dollar, lost its peg.

The selling pressure on LUNA started over the weekend as investors liquidated their earnings on Anchor, a Terra protocol for earning yields on UST, pushing interest rates lower, analytics suggest.

That's because of how algorithmic stablecoins like UST operate. One UST can be redeemed or minted for exactly $1 worth of LUNA at any time. In theory that helps UST retain its value and creates demand for both tokens.

Traders can continuously buy and sell LUNA and UST to maintain the peg and profit by doing so, incentivizing them to maintain UST’s peg.

This week’s drop in the UST price – it fell to as low as 22 cents Wednesday – caused additional LUNA to be minted and issued into the open market. According to Messari data, LUNA's circulating supply more than tripled to 1.4 billion tokens on Thursday from 377 million two days ago.

The vastly increased supply added selling pressure on LUNA tokens, as the price drop shows. At the same time, it put UST on a path to recovery, with the tokens recovering to the 60 cents level in European morning hours on Thursday.

In addition, Terra proposed several measures on Thursday that would save UST's peg and prevent LUNA from getting severely diluted.

The week's slump in LUNA pushed it out of the top 10 cryptocurrencies by market capitalization to rank 81st this morning. The tokens were valued at just under $4 billion last week, while on Thursday the capitalization snapped down to $720 million.

Still, some market observers remain upbeat on the longer-term outlook of algorithmic stablecoins.

"It is still the earliest days of algorithmic stablecoins," Brian Gallagher, co-founder of Partisia Blockchain, said in a Telegram message. "There will be many failures along the way to hold the peg, as they're mostly in the experimental phase. We have to accept the failures along the path.”

Possible contagion risks, however, pushed tether (USDT), the biggest stablecoin by market capitalization, to lose its peg with U.S. dollars in European morning hours today.

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Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

Shaurya is an analyst/editor for CoinDesk's markets team in Asia.

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