- Terra (LUNA-USD) prices are continuing to shrink, prompting developers to halt the entire Terra blockchain
- LUNA crypto is trading at 1 cent after reaching an all-time high of $119 just last month
- The news comes alongside word that Terra founder Do Kwon is behind another stablecoin protocol which failed
The crypto market is widely trending down. But even while Bitcoin (BTC-USD) dips below $30,000, it’s Terra that’s stealing the show. Both die-hard crypto believers and skeptics are chattering about the LUNA crypto and its partner TerraUSD (UST-USD) as their prices get obliterated. The spiraling is becoming so bad, in fact, that developers are now putting a halt to the Terra blockchain.
The problem with LUNA stems from UST’s de-pegging this week. See, LUNA and UST operate together through supply elasticity — this is how UST keeps its value at $1. When UST passes $1, the protocol burns LUNA to mint UST, bringing down prices through dilution. On the flip side, it burns UST to mint LUNA when UST drops below $1, increasing demand and boosting prices.
UST’s algorithmic nature is a central point of tension now. Critics say that algorithmic stablecoins are more volatile than reserve-backed cryptocurrencies like USD Coin (USDC-USD). As long as these reserve-backed coins have enough assets to back each token, they can remain solidly atop their pegs.
UST, on the other hand, was already knocked from its peg earlier in the year when many users simultaneously sold off their UST. The algorithm could not keep up with the outflow, causing UST prices to drop to 70 cents.
Terra Blockchain Remains on Pause as Developers Plot Next Steps
Terra developers have added a hefty backing of cryptos to act as a reserve for UST since this first 2022 de-pegging, but it’s not proving enough. Since the beginning of the week, prices of UST have fallen to a low of 30 cents, causing a mass exodus from the project. Moreover, LUNA crypto prices are tremendously down. A 99% decline now sees the coin trading at barely over 1 cent.
The developers who oversee Terra have been uncharacteristically quiet this week as they scramble to find a way to halt the plummet. This morning, they finally elaborated on a three-pronged plan, burning massive amounts of UST and staking LUNA to help stabilize the two.
Validators are applying a patch to disable further delegations, and they will coordinate to restart the network in a few minutes. https://t.co/4gakxPLpLm
— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022
But just hours after announcing the plan, Terra is going on the defensive again with drastic measures. It appears these developers have put a halt on the Terra blockchain, preventing any new transactions from occurring. The reasoning for this is due to LUNA’s role as a governance token; developers do not want somebody to scoop up massive amounts of LUNA tokens at this new microscopic price because it would allow that buyer to control the network entirely by owning a majority of governance over the network.
As this news breaks, Terra continues to find itself under scrutiny. CoinDesk reported earlier this morning that Terra founder Do Kwon is behind another stablecoin project that failed in 2020 called Basis Cash. Working under a pseudonym with Basis Cash, this information was not public until today.
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.