Just a few weeks ago, traders were anticipating LUNA prices to break $100 again and continue soaring. In an unexpected turn of events, things got sour and LUNA collapsed to a current price of $1. This madness made LUNA investors lose 99% of their holdings. Additionally, UST price is still not properly pegged. There is a new proposal that aims to fix this mess and bring the peg back to UST. Will this affect LUNA price and push it upwards again? Will LUNA recover? Let’s go back to the basics and see if things are going to pick up for Terra.
What is Terra Crypto?
Terra is a truly decentralized financial blockchain with the vision to build a simple and powerful payment network. Founded by Terraform Labs in 2018, Terra wanted to revolutionize the financial space by usurping the traditional financial system through the use of algorithmic stablecoins. Algorithmic stable coins were supposed to be safer, inflation resilient. On the other hand, everything collapsed recently.
Why did LUNA Crash?
The algorithmic stablecoin UST consists of a basket of several cryptocurrencies. The arbitrage activity that keeps UST pegged is successful under normal market conditions. During the current crypto market crash, one-sided buys or sells can’t keep the equilibrium, thus breaking the peg. This requires heavy intervention, like excessive buying or selling depending on which side was broken. In today’s case, Terra foundation needs to buy excessively to bring the peg back to 1$.
In order to save UST, LUNA tokens were excessively sold on the open markets, dragging their prices downwards. The selling pressure started with the crypto market’s recent crash, then aggravated with UST’s unpeg. The most brutal collapse happened when the snowball effect started to happen, crashing LUNA prices from 65$ all the way to 1$.
New Proposal set to save UST
In an earlier tweet, the founder of Terra announced that there are strict measures in place that are set to try and save the UST peg. The revival proposal is set to do the following:
- Endorse the community proposal 1164 to Increase base pool from 50M to 100M SDR
- Decrease PoolRecoveryBlock from 36 to 18 – This will increase minting capacity from $293M to ~$1200M
Will LUNA recover from the Proposal?
The above proposal is set to save the peg of UST. However, it might also affect LUNA and help bring confidence back into Terra’s ecosystem. LUNA is one of the tokens used by UST to help in its peg. For LUNA and UST to recover, many external factors must come into play:
- The crypto market needs to recover: this will help reduce the outstanding debt of Terra
- Investors’ confidence to get back: this will help keep the capital in place and reduce dumping
- Active measures by Terra: the company already started with this step. However, the channel of communication with the investors should remain open and transparent
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