Dear Readers,
When I wrote earlier this week about how companies using Bitcoin as part of their investment strategy instead of as money is not ideal, I had no idea that the market would prove my point so quickly. Of course, most people probably didn’t anticipate this week’s chaos that hit the market for the Luna cryptocurrency and the TerraUSD stablecoin it was tailor-made to support.
Coming Back Down To Earth
TerraUSD was wildly popular over the past several months, with its market cap catapulting into the top ten cryptocurrencies as a result of its growing prominence.
As a stablecoin, its goal is to maintain price parity with the U.S. dollar. But unlike collateralized stablecoins like USDC and Tether that maintain their peg by (supposedly) holding actual dollars and dollar equivalents, TerraUSD is an algorithmic stablecoin that attempts to hold its peg through a series of incentives built into the code. One TerraUSD is always supposed to be redeemable for one dollar’s worth of its sister cryptocurrency Luna. So if the value of TerraUSD falls below $1, market participants are supposed to be incentivized to buy a TerraUSD, redeem it for $1 worth of Luna, and then make a profit on the arbitrage.
Unfortunately for holders of TerraUSD and Luna, the incentives system appears to have not held up. The markets for both cryptocurrencies have been rocked as TerraUSD has completely lost its peg, sitting at around $.12 as of this writing, and as Luna lost over 99% of its value in just the seven-day period leading up to Thursday evening. A rough time to be a “LUNAtic” (as they like to call themselves), to be sure.
