Interesting news never stops flowing through the cryptocurrency community, and it’s surely not slowing down in 2022. This week is bringing lots of drama, and that drama is dragging down a whole host of cryptocurrencies. One of the most well-known plays suffering as a result is Terra (CCC:LUNA-USD). But, what exactly is behind the losses being heaped upon the Terra (LUNA) crypto today?
The news today stems all the way back to the existence of QuadrigaCX in 2019. At the time, QuadrigaCX represented the largest crypto exchange in Canada, serving thousands of Canadian citizens and traders abroad. At that point, QuadrigaCX had been serving investors for over six years. However, in 2019, things collapsed. The exchange ended up shutting down almost overnight, with over $136 million in assets under management swiped from investors. An FBI investigation ensued, after which the exchange was discovered to be a Ponzi scheme.
Three years after the events of QuadrigaCX, there is a new DeFi ecosystem with which investors are entrusting their assets. That ecosystem is Wonderland (CCC:TIME-USD), a fork from DeFi protocol OlympusDAO (CCC:OHM-USD). The Wonderland platform has over $660 million in its treasury balance, and promises users a jaw-dropping 83,000% APY on staked assets.
The Wonderland platform offers users some unbelievable returns on investments. That’s not unheard of; there are tons of projects promising high returns in the DeFi space. The problem lies, however, in the fact that the Wonderland co-founder was revealed to be the co-founder of the QuadrigaCX platform, and a key player in its ensuing scandal.
Terra (LUNA) Crypto Drops Through Distant Association With TIME
So, how does this news circle back to the Terra (LUNA) crypto losses suffered today? Well, it all has to do with Terra’s link to a crypto called Magic Internet Money (CCC:MIM-USD).
MIM is the crypto that underlies DeFi lending protocol Abracadabra (CCC:SPELL-USD). Users can borrow MIM from the protocol by placing down collateral. They can then take that MIM and use it elsewhere. One of the places that MIM holders popularly take their assets is the Wonderland platform. That’s because Abracadabra and Wonderland are close partners, and many of the DeFi tools on the Wonderland platform involve MIM/TIME token pairings.
MIM is then connected to LUNA as they are both members of the Terra ecosystem. Not only this, but MIM and the TerraUSD (CCC:UST-USD) stablecoin are closely linked. This is because Abracadabra offers a yield farming tool that links MIM and UST. As news broke about Wonderland’s co-founder, the mass exit of users from MIM pools knocked the token from its $1 USD peg. That volatility then in turn knocked UST from its own $1 USD peg.
This comes around to bite LUNA because of its close relationship with UST. Indeed, the Terra protocol uses a price-stabilization algorithm linking UST and LUNA supplies. The protocol adjusts the supplies of both cryptos in order to keep UST at $1. The roundabout relationship with LUNA is also leading to a lot of fear, uncertainty and doubt (FUD) among LUNA holders as well, helping to hold down prices. LUNA is currently down over 17% on the day.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.