- LUNA is on the verge of total collapse as it dropped to below $7 overnight
- UST mirrored the collapse, losing all yesterday’s gains and dropping to $0.60
- Some observers have argued that unless the project is bailed out that LUNA will continue to drop to zero
LUNA dropped under $7 overnight as the TerraUSD stablecoin erased almost all the temporary gains made yesterday, continuing the collapse of the 11-figure project. The algorithmic stablecoin, which was lauded by those making bank off the APR mechanisms earlier in the year, rebounded to $0.95 yesterday but could not sustain the bounce, and has now sunk below yesterday’s lows. This is despite the project’s leader Do Kwon promising that deals were in the works to save the beleaguered project. Some predict that LUNA is now programmed to go to zero due to the mechanics, an incredible situation given that it was valued at $120 just a month ago.
UST Collapse Makes it to Congress
The collapse of LUNA and UST has been nothing short of spectacular, with the situation being the only talking point in the cryptocurrency space for the last 48 hours. Yesterday it even made it into a meeting of the Financial Stability Oversight Council in the U.S., where Treasury Secretary Janet Yellen referenced it in relation to stablecoin regulation.
The same mechanisms that favored UST and LUNA on its way up are the same ones that are now dragging it down, with some suggesting ways in which large players could have played the algorithm to their own benefit, getting out before the system imploded:
1. Long $100M of $LUNA
PnL impact: $0
Net PnL: $0
— FreddieRaynolds (@FreddieRaynolds) November 25, 2021
The second collapse of the UST peg and the further collapse of LUNA has come despite the Luna Foundational Guard deploying $1.5 billion in funds to try and prop up the peg and Kwon promising that he was “getting close” to securing enough funding to recover the project.
Can LUNA go to Zero?
In the hours since that claim however, LUNA has collapsed from $20 to $7 (and counting), while the UST peg has been eviscerated to $0.60, and the algorithms in place mean that worse could be to come:
With the peg gone $LUNA will go to zero by design (as arbitrageurs buy UST & sell LUNA) unless parity and trust are restored, which can only be done by means of a significant cash infusion and changes in the protocol.
— Alex Krüger (@krugermacro) May 11, 2022
The reason why a LUNA death spiral can take place is because while the UST:USD peg is off, anyone can mint $1 of Luna with 1 UST. This means they can also buy 1 UST for $0.7, mint $1 of LUNA from it, and then sell that LUNA on the open market for a profit. This will, in all probability, continue all the way down until it doesn’t become profitable, or unless big money steps in to restore the peg.
Whether the CEOs of same companies that were looking to help rescue the project yesterday are waking up with the same enthusiasm remains to be seen, but what seems much more likely now is that the Terra USD experiment is left to dwindle into obscurity and something better (and more stable) is built out of the ashes.