Thread by @ZenGo

It’s been a challenging time in the #crypto market - especially for the #Terra $LUNA ecosystem and $UST stablecoin.

Here’s a thread about what’s going on 🧵 1/16

⬇️

2/16 $UST @terra_money is the US dollar #stablecoin in the Terra Luna ecosystem.

The goal of any stablecoin is to achieve price stability – whether the coin is pegged to the US dollar, Euro, or Korean Won, what you see is (ideally) what you get: A stable, dollar-like currency.

3/16 One of the most important questions is HOW a stablecoin remains stable: How the stablecoin is collateralized, or how the coin is backed.

There are 3 main ways, and #Terra $LUNA is an algorithmic-backed type.

Learn more about stablecoins here:

4/16 Algorithmic stablecoins don’t rely on reserves like US dollars to maintain stability.

Instead, these types of #stablecoins use an internal mechanism to regulate supply, like the way a country’s central bank can adjust its currency based on market supply and demand.

5/16 The #Terra ecosystem uses its native cryptocurrency $LUNA to smooth out potential short-term price fluctuations in $UST. The exchange rate is always $1 of $LUNA gets you 1 UST.

So if you want to mint 1,000 $UST you have to swap $1,000 worth of $LUNA.

6/16 This keeps the price stable because: When demand for $UST rises and it trades above $1 then anyone can easily swap $1 of $LUNA into 1 $UST for quick arbitrage profit, which dilutes the supply of $UST, bringing the price back to an equilibrium.

7/16 Likewise, when $UST trades below $1, anyone can easily swap 1 $UST into $1 worth of $LUNA for some quick arbitrage profit, which lowers the supply of $UST, bringing the price back to an equilibrium.

8/16 But, when the #crypto market starts to fall heavily, the system becomes more fragile.

When the value of 1 $LUNA starts to drop fast, there is less demand to swap $UST for it (because it could keep falling).

9/16 Recently, the price of $LUNA fell enough to cause liquidations on many loans in the Terra ecosystem.

These liquidations can happen when people take out loans of other #crypto with $LUNA as collateral.

10/16 When the price of $LUNA fell, the collateral backing the loan approached the loan amount, and the protocol sold $LUNA to cover the balance, which continued to drive down the price of $LUNA.

11/16 At the same time, people are selling crypto into dollars, reducing $UST demand, dropping its price.

On May 9, total value of all $LUNA dropped below the total value of all $UST. This signaled that there wasn't enough $LUNA for everyone holding $UST to exchange for $1.00.

12/16 The #Terra ecosystem then saw a very large selloff of $UST. The enormous sell pressure drove the price of $UST down from its normal $0.99 - $1.01 range to as low as $0.74 in about 12 hours.

13/16 The #LFG (Luna Foundation Guard) had a large supply of #Bitcoin as reserves for this type of emergency.

They started buying $UST to offset the selloff. These efforts stabilized the price to ±$0.90 for close to 16 hours, but, unfortunately, it wasn’t enough.

14/16 During the following hours, the $UST price dropped far beyond the #LFG's control, hitting a low of ~$0.30 and currently sitting ~$0.50.

3 hrs ago @stablekwon released a rescue plan. Learn more here ⬇️

https://twitter.com/stablekwon/status/1524331171189956609

15/16 What has happened has been incredibly difficult to navigate for both the #LFG and the #Terra $LUNA community.

Our ❤️ are with all #LUNAtics & the #devs working so hard to stabilize the situation.

16/16 We hope this thread helped you understand the situation more clearly.

Be safe and #StayZen 🙏

These are difficult times, but the #crypto ecosystem has seen them and overcome them before.

To learn more about #stablecoins ⬇️
zengo.com/what-are-stabl…

End 🧵