Crypto month at a glance: Terra’s black swan event ruled the market

Luna was a layer-1 platform that focused on DeFi (Decentralised Finance) protocols with its algorithmic stablecoin UST. Stablecoins are cash equivalent in the crypto space and often backed by either fiat currency (USDT) or crypto (DAI).

They are crucial in most DeFi protocols. UST did not have any collateral and maintained its 1 dollar value with the help of arbitrage.

This was possible as anyone could convert $XYZ of UST for $XYZ of LUNA and vice versa under any market circumstances. So, if UST’s price went above 1 dollar, people would buy LUNA (Let’s say $100) from the market, convert it into UST and sell UST (for more than $100) in the market, thus making a nice riskless profit. UST’s value is also brought back to a dollar as the supply of UST increases while LUNA’s supply drops.

Unfortunately, this activity goes both ways, and here is why LUNA collapsed. There was a large amount of UST dumped in the market which made it lose its peg towards the downside.

This triggered the arbitrage activity that is supposed to bring UST’s value back to a dollar. People started buying the cheap UST from the market, converted it into LUNA (which was worth more), and sold it in the open markets to realise the riskless profit.

This led to an increase in the supply of LUNA at the cost of bringing back the peg. This did not happen as the huge dump of LUNA brought a lot of fear in the market regarding UST’s depeg. So as soon as the UST’s value reached closer to the dollar, people sold their UST at a higher price.

The Luna foundation then decided to sell their 3 billion dollar BTC in the market to remove the pressure of LUNA (As a lot of LUNA was minted to bring UST’s peg back). However, it did not work and the overall market dropped. Eventually, the public lost its confidence in UST and it fell significantly. LUNA’s supply skyrocketed to 6,541 billion tokens.

The founder of the project came up with a new strategy to bring back LUNA by creating a new chain and airdrops for the people who lost money. The airdrop began at the end of May and the new token (also referred to as LUNA) listed on all major platforms by the end of the month.

Solana Outage

Solana, a layer 1 blockchain that did a 100x in the last 2 years suffered another outage yet again. This marks the 8th time Solana has gone down. It is quite ironic as it did 100x because of its scalability, which is one of the biggest problems amongst layer 1 platforms.

Although the project is backed by several big names in the crypto industry, retail investors are taking a massive hit as the price has crashed. Similarly, DeFi users could not add margin and were liquidated. Although it would not crash just like Luna, people are wondering if it is following the same route as LUNA.

Top gainers during the week (as of 7 am, June 5, 2022. Source: CoinMarketCap)

⦁ Waves (WAVES): 89% up

⦁ Helium (HNT): 32% up

⦁ Cardanao (ADA): 21% up

⦁ The Graph (GRT): 17% up

⦁ ThORChain (RUNE): 16% up

Top losers during the week (as of 7 am, June 5, 2022. Source: CoinMarketCap)

⦁ Solana (SOL): 12% down

⦁ Convex Finance (CVX): 10% down

⦁ 1inch Network (1INCH) 6% down

⦁ Fantom (FTM): 6% down

⦁ Curva Dao (CRV): 5% down

(Note: Only top-10 cryptocurrencies are considered)

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