19.07.2022

What happened to LUNA and UST?

You still can not understand what happened to LUNA and UST? Specially for Blockchain Life this question is answered by Roman Kaufman in his unique manner and in simple terms.

Friends, in order to understand what happened, let’s first start with basic concepts.

Luna (LUNA) and TerraUSD (UST) are two native/native tokens of the Terra blockchain based on the blockchain project developed by Terra Labs in South Korea.

The founder of Terra is Do Kwon, a former graduate of Stanford University in computer science. By the way, in 2021 he was on the list of the most influential people of the year according to Coindesk.

Do Kwon did a real miracle by increasing UST’s market capitalization from $180 million at the beginning of 2021 to almost $15 billion in March 2022, and LUNA’s price rose 138 times. Here they are… your favorite XXX.


Roman Kaufman, founder of Berezka DAO and DeFiHardcore

UST is an algorithmic stablecoin pegged to $1 using the LUNA token. The coin involves using a smart contract based algorithm to keep the price of UST at $1 by burning (irrecoverably destroying) LUNA tokens to create new UST tokens.

At the same time, stablecoins like USDC and USDT are backed by real assets to maintain their peg to the dollar. (that’s what they say)

▪️In the Terra ecosystem users can always exchange a LUNA token for UST and vice versa at a guaranteed price of $1, regardless of the current market price of any token. This is important to note because it means that if demand for UST rises and its price exceeds $1, LUNA holders can make a risk-free profit by exchanging $1 LUNA to create one UST token.

▪️During the exchange part of the LUNA is burned (permanently removed from circulation) and the rest is placed in the community treasury.

▪️Burning a certain percentage of LUNA tokens reduces the total amount of tokens left in circulation, making them more scarce and therefore more valuable. Creating more UST tokens dilutes the existing tokens in circulation and lowers the overall price to $1.00.

Similarly, if demand for UST is low and the price drops below $1, UST holders can exchange their UST tokens at a 1:1 ratio for LUNA, which are worth more due to their scarcity and so the user can get another risk-free bank. Therein lay the problem.

How smart people tried to use it?

– Buy UST on any Dex and mortgage at 19.5% APY.

– Then, you take UST again on the security of your deposit up to 90% of your own amount (this is called the collateral factor), at 12%. This is a lot and only a madman could take an asset at such a percentage.

– And yes, when you are such a madman, you take a loan at 13% to place an asset at 19.5%

– Doing several cascades, inflating $10,000 to $50,000 with a positive delta per loan

– Well, after that, you fantasize about a comfortable life.

Here is an example of one case:

– Person deposited $1,000,000

– According to the above financial chain, taking into account the risks, dispersed the amount to $5,000,000

– Taking into account all the numbers, collateral factor, interest and other things, the income was almost ~ $320,000.

$320,000 bucks per year! After such numbers, you really will begin to believe in super knowledge and that you have gone through this life.

More and more people began to scroll through this financial model on Terra.

Now to the numbers or that death spiral for Terra

Statistics in one of the periods:

▪️Loans $6B * 13% = $0.78B/year. So much will come from borrowers.

▪️Deposits $12B * 19.5% = $2.34B/year. So much to pay on deposits.

Negative delta : $0.78B – $2.34B = -1.56B/year = -$130 million per month!

Such a negative balance no longer allowed the Do Kwon team to adequately respond to the situation and therefore the Terra team began withdrawing money (according to media reports). This is where the pyramid collapsed.

P.S. The man who invested $1M, due to his greed lost almost everything.

The current crisis is a logical correction of the crypto market and its cleansing from unscrupulous projects. As always, only the strongest and most fundamental players will remain in the game. Keep an eye on them now to take all the market growth when the time comes.

In order to learn more about the situation on the market and how to earn even during its fall, come to Blockchain Life 2022!

More about tickets: https://blockchain-life.com/europe/en/#tickets-row 

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