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Analyst States What Went Wrong with Terra! Will LUNA Price Recover?

Author: Nidhi Kolhapur

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Nidhi is a Certified Digital Marketing Executive and Passionate crypto Journalist covering the world of alternative currencies. She shares the latest and trending news on Cryptocurrency and Blockchain.

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Willy Woo, a leading on-chain expert, has identified a serious fault in Terra’s UST design that may have resulted in a “death spiral” for both LUNA and UST assets.

Woo noticed the major flow in the backing mechanism, in which the Luna Foundation Guard pledged to sell its BTC holdings in favor of UST, which should have boosted the stablecoin’s value and relieved pressure on Luna.

However, the reality differs significantly from what was predicted on paper. The Luna Foundation Guard possessed billions of dollars of Bitcoin, which it instantly dumped on the bleeding market, causing a panic among market makers and investors.

LFG’s increased selling pressure prompted a BTC meltdown, which drove the entire market down with it, including LUNA. With increased Bitcoin market dominance, Luna continued to plummet, thereby putting LFG into a death spiral in which LFG would have to sell more BTC and Luna would collapse, taking UST down with it.

LFG’s actions were contradictory, according to Woo, and accelerated the de-peg because of LUNA’s backing mechanism.

A less destructive and possibly accurate way of dealing with the problem would have been a cautious and consistent injection of cash into UST, which would have put less pressure on the market in general, and Luna in particular. 

Will LUNA recover?

The only way for the LUNA price to rebound to anywhere near its previous high of over $100 would be to burn a major portion of the circulating supply, which is currently at 6.5 trillion, down to around 350 million before the fall.

That’s no easy task; it’s been announced as part of the LUNA and UST recovery plans, but whether it can be accomplished remains to be seen. Another question is whether cryptocurrency will recover. Bitcoin is holding steady around $30,000, but has yet to break out to the upside or close a candle above the daily EMA 8.

Even if the Terra supply isn’t burned, getting back to $1 is theoretically impossible. In November 2021, when Bitcoin was over $69,000 and Ethereum was over $4,800, the total cryptocurrency market cap was just over $3 trillion. 

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Nidhi Kolhapur

Nidhi is a Certified Digital Marketing Executive and Passionate crypto Journalist covering the world of alternative currencies. She shares the latest and trending news on Cryptocurrency and Blockchain.

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