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

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The month of May would be con­sid­ered as the high­light in the cryp­to indus­try as Luna, a top 10 coin crashed to noth­ing. Oth­er alt­coins con­tin­ued to feel the pain.

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) 

(Dis­claimer: Rec­om­men­da­tions, sug­ges­tions, views and opin­ions giv­en by the experts are their own. These do not rep­re­sent the views of Eco­nom­ic Times)

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