Cryptocurrency has evolved a lot since it was launched. Many technologies and types have been introduced so far. Earlier, there were coins based on Blockchain technology that was volatile. Later, they brought Ethereum-based crypto and then meme coins. But in all of these Cryptocurrencies, one of the features was common; volatility. Then came stable coins, stable Cryptocurrency.
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What are Terra and LUNA?
Terra is developed by a South Korean firm called Terraform labs. This is a stable coin that is comparatively less volatile than other Cryptocurrencies like Bitcoin. Terra and LUNA are sister coins and have the same developers. Both these coins had their balancing act and both of these were getting the benefits. It means, that if Terra coin gets an economic surge, LUNA also experiences the same.
So, here the main question arises if everything was planned so well. The coins were designed to balance each other. Then, what went wrong which leads to this biggest collapse. Before going to the cause of the collapse. Let’s understand how Terra and LUNA used to work.
Working of Terra and LUNA:
Bitcoin and Ethereum are considered to be volatile Cryptocurrency, their price goes up and down more frequently. To combat this issue, stable coins were designed. This attracted many users who were looking for fixed profits in their Crypto investment.
Terra and LUNA were designed in a way that both could balance each other. An algorithm was designed by developers by which Terra and LUNA had to maintain the same value as USD. Users have to sell Terra to Mint LUNA and sell LUNA to Mint Terra. Both the sister’s coins were maintained by this balancing act.
This balance became one of the reasons for the collapse of Terra and LUNA. Let’s understand the collapse and the reason for the same.
How does the Terra collapse occur?
Terra’s collapse occurs mostly because of the balancing act between Terra and LUNA coins. The balancing act between Terra and LUNA broke because of some rumors which lead to this collapse. Users of Terra coin were benefiting from the Anchor protocol. Anchor protocol was a kind of savings for these users.
Every Terra holder had to park their token in Anchor protocol in return for 20 percent interest. Some rumors arise that Terra is changing the fixed interest rate and in a panic, a large number of users withdraw their tokens.
Some of them also exchanged their Terra for LUNA. Terra and LUNA were purely based on supply and demand. This sudden withdrawal of Terra and rise in demand for LUNA leads to disturbing the balance. Hence, both of these coins collapsed.
Effect of Terra collapse on other Cryptocurrencies:
When Terra and LUNA collapsed this created fear among other Crypto users. As a result, they started selling other Cryptocurrencies too. This resulted in a fall in the price of other Cryptocurrencies too like Bitcoin. This all created a huge loss in the Crypto market. But, now things are changing and the market is now stabilizing.
Binance CEOs take on Terra collapse:
After the Terra collapse, Binance CEO, Changpeng Zhao came forward to criticize the developers. He also shared some lessons which we should take from this collapse. He criticized the balancing act of the coins. He also said that the decision of giving 20% interest on the Anchor protocol was not wise. Before giving money, developers should have focused on making money. He also criticized their step of using their LFG to buy Bitcoin to bring stabilization. He stated this was an unnecessary step.
Along with all this, he shared some lessons which a user or investor should focus on. Before making any kind of investment, look at the basic design and fundamentals of coins. Without proper research, any kind of investment would result in loss. He also announced his support for the Terra community.