Following the recent update on the downfall of the LUNA price here are the reasons LUNA and UST Stablecoin fell to nearly zero
According to data from CoinMarketCap, the price of Terra’s native governance and staking token, dropped 99.97% yesterday and is now trading at $0.00005395.
What Is Behind LUNA, UST Fall In Price?
1. LUNA Was Paired With UST
The reason for LUNA’s free fall is that it was paired with UST.
UST is a stablecoin based on an algorithm. Unlike stablecoins like USDC and USDT, which are backed by real-world assets, algorithmic stablecoins are not. Instead, this type of stablecoin is run by smart contracts that run themselves.
With this arbitrage between the stablecoin and LUNA, there was pressure to sell LUNA, which made the token crash happen faster.
2. The Mint-and-Burn Mechanism
The Terra token is designed to help stabilize UST at its dollar peg with a “mint-and-burn” mechanism. Users could swap $1 worth of LUNA for UST, and vice versa. Each time Terra’s token is swapped for the algorithm stablecoin, that LUNA is also burned.
This week, though, this mechanism was put under a lot of pressure, and UST’s dollar peg began to slip quickly.
As investors tried to get out of the algorithm stablecoin and into Terra, a lot of LUNA tokens were made.
CoinMarketCap says that the UST, which used to be tied to the dollar, is now trading at $0.17.
3. Terra Builder Alliance Stopped Using UST As An Algorithmic Stablecoin
Also, the Terra Builder Alliance, a group trying to save the Terra ecosystem as it falls apart, made a plan today to stop using it as an algorithmic stablecoin for good.
According to the proposal, once all the algorithm stablecoin have been traded for Terra tokens, the stablecoin will no longer exist in its current form.
The goal of the proposal is to make a “collateralized stablecoin,” but it’s not clear how that would work.
Binance Halts Trading for Terra, Delists LUNA, UST
Binance, the largest cryptocurrency exchange in the world, said today that it has taken both Terra and the stablecoin off its list.
At 12:40 a.m. UTC today, the Terra tokens were taken off both the margin and spot markets.
On Thursday, Binance told users that the Terra and Tether (USDT) trading pairs would be taken off the exchange if the price of Terra fell below $0.005.
Earlier this week, Binance also temporarily stopped withdrawals of the stablecoin and Terra because of the high number of withdrawals that were still pending.