Terra Death Spiral Gets at $3 Bailout Rumors fade

Terra has been unable to recover because its UST stable coin has been unable to restore its dollar dependence. Rumors suggesting that an investment in venture capital is not working have more downward pressure on the price of LUNA.

The Terra ecosystem is deteriorating.

It is reported that the Layer One blockchain’s LUNA token has dropped by an additional 90% over the past 24 hours when selling pressure has reached new levels. Terra’s algorithm-based UST stablecoin also slipped away from its dollar peg, crashing briefly reaching a sweeping low of $0.30 before making a modest rebound. LUNA is trading at just over $3, which is down more than 96% over the course of this week.

The efforts to restore the dollar peg of UST have affected the value of LUNA. UST is determined to keep its peg’s algorithmic value by allowing anyone to swap the value of 1 UST to $1 of LUNA tokens. In normal circumstances, this algorithmic connection could encourage arbitrageurs to get value from the disparity in the price in UST or U.S. dollars, helping to maintain a price of about $1.

Terra’s dual token system typically maintains UST within 1percent of its anticipated dollar value. But, if UST drops substantially under its dollar equivalent the algorithmic relationship creates more LUNA tokens, which arbitrageurs must to trade on an market in order to earn a profit through their transactions. If the peg of UST isn’t restored, the surge of LUNA tokens could create an unending spiral that pushes the price down until the peg of UST is restored.

In response to LUNA’s rapid decrease, Terraform Labs CEO Do Kwon was on Twitter Wednesday to discuss the situation with the community and to outline the next steps for the company. “Before any other action, the only way for the future is to take on the stablecoin supply which is looking to leave before $UST begins repeg. There’s no way around this,” Kwon stated, speaking of the disparity between the circulating quantity of UST and the dwindling price cap for LUNA. To accelerate the process of reducing UST supply to below the cap on market value for LUNA, Kwon has endorsed an idea from the community that would increase UST burning capacity and LUNA minting capabilities from 293 million dollars and up to $1.2 billion.

LUNA isn’t the sole Terra ecosystem token to experience huge losses in the past 24 hours. The tokens of the top Terra DeFi protocols such as Anchor and Astroport have also decreased by 72.3 percentage and 81.6 percent. According to the blockchain data platform DeFi Llama , the overall value of the Terra DeFi protocols has dropped by more than 87%, between $29.65 billion as of May 5, to $3.75 billion as of today.

Yesterday the Terra’s LUNA token seemed to be stabilizing around $30 after reports of a bailout spread via social media. Based on Larry Cermak, Vice President of Research at The Block, numerous venture capitalists such as Jump Capital and Alameda Research were reported to have offered two billion dollars for the purpose of helping “bail in” UST and help it to regain the dollar’s peg.

But, a recent Twitter message from cryptocurrency researcher mhonkasalo confirms that the campaign may be in a state of disintegration. The truth of this story isn’t yet proven. However, given the deterioration of LUNA’s infrastructure and confidence in UST decreasing, it’s likely that the previous investors are becoming hesitant when they are asked to put in more money in order to support this Terra ecosystem.

Disclosure at the time of writing this article the author was a holder of ETH, LUNA, and various other cryptocurrency.

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