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The Terra Crash Wasn’t The Main Catalyst for The Crypto Meltdown

According to the blockchain analytics platform, last month's crypto market crash was "more closely related" to a wider tech market decline....
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According to the blockchain analytics platform, last month’s crypto market crash was “more closely related” to a wider tech market decline.

Chainalysis, a blockchain analytics platform, has published a report analysing Terra’s stablecoin UST. It concluded that although it was a contributing factor to the recent crypto market crash it wasn’t the main deciding factor.

The report stated that “the recent downturn in crypto markets appears to be more closely related to the tech market decline rather than to UST’s collapse.”

Chainalysis reports that Bitcoin is “a relatively recent development” in its correlation with tech stocks. The leading cryptocurrency has “significant price correlations with the NASDAQ-100 Technology Sector Index, and the S&P 500 Index in 2022.” It also falls in concert with these indexes.

Chainalysis discovered that Bitcoin’s downtrend was exacerbated by UST’s crash, but it was only temporary, with the end to the accelerated decline coincident with UST’s collapse. Bitcoin’s price action “fell back into line with other crypto tech assets.”

Stablecoin redemptions also spiked after the crash. Data from exchanges shows that there was a spike of stablecoin trading volume during Terra’s collapse between 9th and 12th May.

Chainalysis reported that all types of investors, including big institutional players and retail investors, sold their stablecoins in the crash.

What caused the UST to crash?
Terraform Labs (TFL), which is the company behind Terra, announced a planned withdrawal of $150,000,000 from 3pool, a Curve liquidity fund.

Two users exchanged $185 million UST for USDC within two hours of the withdrawal. This attack on the pool with less liquidity was swiftly completed.

TFL responded by obtaining another 100 million USTs from 3pool in order to rebalance the company.

These two large trades caused UST’s dollar peg to slip, triggering a significant sell-off in the exchanges that led to further slide of the peg.

Luna Foundation Guard (LFG), custodian of UST sold billions of Bitcoin reserves on May 9 to help save the coin’s peg.

LFG could not save UST’s life from the death spiral because its reserves were shrinking.

What caused the LUNA to crash?
An algorithmic stabilizecoin, UST’s dollar peg was governed using smart contracts-based algorithms.

The algorithm that maintained UST at its dollar peg was a mint and burn mechanism between LUNA, UST.

Investors could use 1 UST to buy $1 worth of LUNA if the price of UST falls below a dollar. This would remove it from the market. Investors could then sell the newly minted LUNA and pocket the difference as profit.

Investors could trade $1 worth of LUNA to buy 1 UST if the price of UST rose above a dollar. Investors could sell newly minted UST to make a profit if UST trades at more than a $1.

When UST lost its peg, the artificial supply-demand ratio crashed. This opened up enormous arbitrage opportunities.

Users purchased less valuable UST on exchanges and then burned them to get $1 worth of LUNA. In the end, LUNA became en masse. This caused hyperinflation, which saw the token’s supply drop by 100% in less than a week.

The dramatic fall of Terra has attracted attention from regulators all over the globe, with the U.S. and South Korean prosecutors opening investigations. The crash was investigated by the Securities and Exchange Commission (SEC), as well as South Korean prosecutors.

Felipe Rodriguez

Felipe Rodriguez

Felipe states he has super powers, some argue that case but he does come up with some very clear predictions. Felipe is based in the US and frequently travels to Brazil where he was born. He is a journalist of the future and has a portfolio of crypto projects he has worked with. Felipe always says "The future doesn't scare me as much as the past, crypto is here to stay but only time will tell where it will take us".
Felipe Rodriguez

Felipe Rodriguez

Felipe states he has super powers, some argue that case but he does come up with some very clear predictions. Felipe is based in the US and frequently travels to Brazil where he was born. He is a journalist of the future and has a portfolio of crypto projects he has worked with. Felipe always says "The future doesn't scare me as much as the past, crypto is here to stay but only time will tell where it will take us".

© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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