The cryptocurrency market isn’t pretty right now. Look anywhere and you’ll see red: bitcoin and ether are both down over 30% week-over-week, hitting lows not seen since 2020, and altcoins like solana, dogecoin and cardano are faring even worse. It’s bad news for crypto investors, but nothing unheard of. These are notoriously volatile assets reacting to tempestuous economic conditions.
What’s much more unusual, and much more important, is the collapse of the luna cryptocurrency and its associated TerraUSD (UST) stablecoin. You may not have heard of UST before, or know what a stablecoin is, but it’s a big deal. Billions of dollars in crypto wealth has been vaporized, sending shockwaves throughout the whole market.
There are two intertwined stories here: That of the UST stablecoin and that of luna, both of which are part of the Terra blockchain. The UST coin is designed to retain a value of one US dollar at all times, but depegged on Saturday and has since fallen to as low as 30 cents. Then there’s luna, the centerpiece of Terra’s ecosystem. Its value has collapsed in one of the most stunning crypto crashes ever recorded.
Luna’s price chart depicts a historic crash.
Dextools
The coin’s price fell from $116 in April to just a penny on Thursday. Its marketcap now stands at $641 million, down from a peak of over $40 billion.
“This is historic for the crypto markets,” said Mike Boroughs, cofounder of crypto investments firm Fortis Digital. “This is a defining moment for the space due to its size and impact in terms of the amount of people that lost substantial value.”
Here’s what you need to know.
What’s a stablecoin?
To understand the crypto catastrophe, you first need to know what a stablecoin is. In essence, it’s a cryptocurrency that’s pegged to a more stable currency. The biggest such coins are Tether and USDC, which like most stablecoins are both tied to the US dollar. So if you have 1,000 USDC tokens, for instance, they can at any time be exchanged for 1,000 US dollars.
Stablecoins are integral parts of “DeFi” (decentralized finance), designed to be ways for investors to hedge against the volatility of the cryptocurrency market. Say ether’s price is $1,900 (where it is today), a trader could exchange one ether for 1,900 USDC tokens. If tomorrow ether drops 50% to $950, those 1,900 USDC tokens could be exchanged for two ether, since the USDT is designed to retain its $1,900 value. When investors smell a downswing coming, they put their money on stablecoins like Tether, USDC and, until this week, UST.
The Terra UST coin is different to Tether and USDC in a key way. Tether and US
