Terra Protocol (LUNA) Collapse Resembles 08’ Financial Crisis, Caused by Lehman Brothers
The cryptocurrency market is in the midst of a bear cycle and cryptocurrencies are beginning to resemble their 2008 financial crisis counterparts.
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The “luna crash reason” is a cryptocurrency that has been in the news recently. It’s worth noting that the collapse of luna resembles the 08’ financial crisis, caused by Lehman Brothers.
The industry-wide fallout from UST losing its peg has sent the whole crypto market capitalisation to levels seen in March 2020. Bitcoin has broken through a critical support level of $30,000, causing widespread fear in the crypto markets. Today, with a volume of $255 billion, was the largest volume day in crypto history due to the extraordinary volatility and sell-off of crypto assets.
Most of us understood crypto was in a risky scenario with a significant downside given macro concerns. But, in the last several days, the collapse of UST and the whole Terra ecosystem has hastened the surrender phase, ushering us into a probable extended bear cycle of at least 1-2 years.
Many market players have linked the situation with UST and Luna to the financial crisis of 2008, which was precipitated by the failure of Lehman Brothers. The Luna foundation added bitcoin to its reserve for supporting its algorithmic stablecoin UST, similar to how Lehman Brothers significantly acquired mortgage-backed securities for their portfolio. Although the application of all asset types differs, they have a comparable influence on the price of Luna’s stock or token.
No one was willing to bail out the Lehman Brothers assets because they were so awful. Similarly, no one seems to be stepping forward in the crypto world to restore the peg of UST by investing the necessary money. In this UST debacle, Almeda is compared to Warren Buffet, while Jump Crypto is compared to AIG.
What Will It Take to Get Back on Track?
Bitcoin and Ethereum are the only cryptocurrencies that have gone through many cycles and are deemed “time-tested” by larger market players. They’ve bounced back strongly in prior cycles, setting new all-time highs. However, this does not applicable to newer efforts such as the Terra protocol.
The notion of algorithmic stablecoin was fundamentally flawed in the instance of Terra. Many well-known leaders and builders in the area, including as Sam Bankman-Fried and Vitalik Buterin, have raised reservations about stablecoins that are not adequately collateralized or employ volatile assets as reserves. Sam recently told Bloomberg that algorithmic stablecoins backed by extremely volatile assets such as Bitcoin will fluctuate in relative motion. As a result, if Bitcoin falls, the UST stablecoin will fall with it.
Do Kwon and the Terra community want to alter the system such that it is completely collateralized. UST must first recover its peg before they can proceed. They’ve announced fresh suggestions, including a 371 million token burn on Ethereum, as well as 240 million Luna tokens staked to protect against governance threats.
They must halt the bleeding for Luna’s sake. The supply of Luna grows exponentially as more UST is burnt. The supply has increased from 346 million to 7.1 billion in only four days. Dilution occurs as a consequence of the quick increase in supply, resulting in a large price decline. That is precisely what occurred. In the same time span, Luna’s price has dropped from $63 to less than It is crucial that they stop the bleeding for Luna. As more and more UST is burned, the supply of Luna goes parabolic. In the last four days itself, the supply went from 346 million to 7.1 billion. This rapid spike in supply causes dilution, resulting in a massive price drop. And that’s exactly what happened. Luna’s price has fallen from $63 to less than $0.10 in the same period. So if the Terra protocol wants to make a strong recovery, they need to first bring back the value of UST to $1. This will reduce the selling pressure on Luna, giving them the time required to make modifications to the protocol mechanism..10. If the Terra protocol is to make a major comeback, the value of UST must first be restored to $1. This will relieve the selling pressure on Luna, allowing them to make the necessary changes to the protocol mechanism.
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Nothing is now considered “too big to fail.”
Luna’s market capitalization dropped by approximately $40 billion in only one week. Its ecosystem had a plethora of creative and well-developed apps that outperformed those chevaliers. Edge Protocol, Anchor Protocol, Mars Protocol, Mirror Protocol, and Prism Protocol are among examples.
No one anticipated the algorithmic-pegged stablecoin to fail since it was a tried and true methodology. Why? Everyone believed it was “too big to fail.” However, with cryptography, a single flaw may be exploited to unprecedented levels. That is precisely what occurred with UST.
Many investors placed enormous quantities of money, believing it was the safest method to get high returns (20 percent on Anchor). And now, since their tokens were locked, many of them have lost practically all of their money. Finally, this serves as a sobering warning to all market players that we are operating in a very volatile environment. When compared to other markets, what seems to be secure or low risk, such as stablecoins and other blue chips, actually carries considerable risk.
Karthikeya Gutta, a crypto writer and freelance contributor for ItsBlockchain, was born and raised in India. With in-depth analysis and research, he covers all facets of the sector. His enthusiasm for blockchain and the crypto ecosystem stems from his belief that it has the potential to transform the world and benefit millions of people.
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The “stablecoin crash” is a situation that happened in the crypto world, where a cryptocurrency’s price crashed and it was not able to recover. This situation resembles the 08’ Financial Crisis, caused by Lehman Brothers.