Tech

Cryptocurrency luna crashes to $0 as UST falls further from dollar peg

Key Points
  • Luna, the cryptocurrency associated with TerraUSD, or UST, is now worth $0 as the stablecoin has dramatically lost its $1 peg.
  • The Terra network stopped processing transactions twice in 24 hours.
  • Binance, the world's largest crypto exchange, temporarily delisted UST and luna.
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The sister token of controversial stablecoin TerraUSD is now basically worthless.

Luna plunged to $0 Friday, according to data from CoinGecko, marking a stunning collapse for a cryptocurrency that at one point was worth more than $100.

The demise of controversial stablecoin venture Terra has resulted in a meltdown in the crypto market, which erased billions of dollars in value in a single day.

TerraUSD or UST, is supposed to be pegged one-to-one with the U.S. dollar. UST has however lost its peg and on Friday was trading at around 12 cents, according to data from CoinGecko.

Bitcoin staged a rebound on Friday, jumping above $30,000 despite the ongoing woes of stablecoin TerraUSD which has caused panic in the crypto market. Investors likely took some comfort from news that tether, the world's biggest stablecoin, had regained its dollar peg after declining below $1 for several hours.

The world's largest cryptocurrency bitcoin was last trading at around $30,046.85, according to Coin Metrics data, up 5.3% after it dropped to levels not seen since late 2020 earlier this week.

However, the digital currency is still down more than 15% for the week.

What is UST?

UST and luna are linked. UST is dubbed an algorithmic stablecoin meaning its $1 peg is supposed to be governed by underlying code. That is fundamentally different to other stablecoins like tether and USDC which are backed by real-world assets such as bonds. UST has no real-world reserves.

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The UST algorithm works through a complex system of minting and burning tokens to maintain price stability. A UST token is created by destroying some of the related cryptocurrency luna to maintain the dollar peg.

But the extreme market volatility has put UST to the test and it has been unable to maintain the peg.

Adding further complications is the fact that the Terra blockchain which underpins UST and luna stopped processing transactions twice in less than 24 hours.

Meanwhile, Binance, the world's largest crypto exchange, temporarily delisted UST and luna Friday.

Binance CEO Changpeng Zhao said that while the firm "always aims to be neutral," it "will break that rule this time."

However, as of 10:30 a.m. ET, trading in UST and luna had resumed on Binance.

It comes after Terra announced it would resume the verification of new transactions on the blockchain, but would no longer allow direct transfer through the network. Users are being encouraged to use other channels to do so instead.

On top of the UST saga, crypto markets have been hit by a number of other headwinds including higher inflation and interest rate hikes that have caused a sell-off in global stock markets which has filtered through. The price movements of cryptocurrencies have been correlated to stock markets.

"The Luna/UST situation has hit market confidence quite badly. Overall most cryptocurrencies are down [more than] 50%. Combining this with global inflation and growth fears, does not bode well in general for crypto," said Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.

Even the big bitcoin rebound may not be sustainable.

"In such markets, its normal to see bounces amounting to 10-30%. These are normally bear market bounces, testing previous support levels as resistance," Ayyar said.