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Market Insights

Luna & the Terra attack

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Another action-packed weekend for crypto and the zeitgeist was dominated by a reported attack on Terra’s USD peg (UST), and by proxy on Luna.

There were signs of a momentum shift earlier in the week, when the 20 day moving average flipped from support to resistance around the 88 dollar level. Ever since, Luna’s been under pressure, and was trading right down at 56 dollars as Europe closed up shop on Monday…

Terra

Then things really kicked off. This is far more than a technical move. See, Luna is part of the Terra ecosystem, which also includes UST, a stablecoin designed to maintain parity with the US dollar. It’s essentially a currency peg designed to always trade at 1:1 (1 USD = 1 Terra).

Here’s a chart of UST vs USDT (Tether). The white line is 1:1 parity:

UST vs USDT

The peg failed, reportedly under selling pressure via the Curve & Anchor DeFi protocols, sending the UST stablecoin down to $0.60c.

Why does this matter for Luna?

The original Terra whitepaper is a great reference. From the conclusion:

We have presented Terra, a stable digital currency that is designed to complement both existing fiat and cryptocurrencies as a way to transact and store value. The protocol adjusts the supply of Terra in response to changes in demand to keep its price stable. This is achieved using Luna, the mining token whose stable rewards are designed to absorb volatility from changing economic cycles.

The design is such that Luna is always exchangeable for UST at 1:1, so it acts as a stabilisation buffer. Traders can constantly arbitrage minor fluctuations around the peg and harvest them for profit.

From the same whitepaper:

Luna also serves as the most immediate defense against Terra price fluctuations. The system uses Luna to make the price for Terra by agreeing to be counter-party to anyone looking to swap Terra and Luna at Terra’s target exchange rate.


More concretely:

  • When TerraSDR’s price < 1 SDR, users and arbitragers can send 1 TerraSDR to the system and receive 1 SDR’s worth of Luna.
  • When TerraSDR’s price > 1 SDR, users and arbitragers can send 1 SDR’s worth of Luna to the system and receive 1 TerraSDR.

The price of Luna has tanked by well over 50% since the peg came under stress, although there are early signs of possible buying interest down at $25.

Terra

After such a huge drop however, the market cap (via coinmarketcap) of Luna doesn’t even match the market cap of UST.

Luan vs UST

The Luna Foundation Guard has pledged to take action.

“The LFG Council has voted to execute the following:

  • Loan $750M worth of BTC to OTC trading firms to help protect the UST peg.
  • Loan 750M UST to accumulate BTC as market conditions normalize.

The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize.”

Whether this is enough to restore confidence in the project or merely temporary damage limitation remains to be seen.

Not investment advice. Trading cryptocurrency may not be available depending on your country of residence.

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