LUNA vs TerraUSD: How are they different?
How are the Terra (LUNA) cryptocurrency and the TerraUSD (UST) stablecoin different?
- LUNA and USTC: What’s the difference?
- LUNA and UST: How they are supposed to work
- How LUNA and UST fell
- In summary
After the TerraUSD stablecoin – now the TerraClassicUSD stablecoin – stopped being stable in relation to the US dollar, meaning that the value of UST had become depegged, the LUNA cryptocurrency collapsed.
Since then, LUNA has been relaunched on a new blockchain with the original version of the coin renamed Terra Luna Classic (LUNC), while TerraUSD was rebranded as TerraClassicUSD and had its ticker name changed from UST to USTC.
Just as importantly, the way that UST maintained its price (based on how many LUNC were in circulation) changed, with USTC being backed by collateral in a reserve.
There were seemingly no plans to create a new version of UST, so USTC is very much the same crypto as before.
While LUNA and USTC are linked (indeed, LUNA’s technical full name is Terra), they are not the same thing. Let’s take a look at what makes them different, but also what they have in common.
LUNA and USTC: What’s the difference?
First, both TerraUSD (UST) and Terra (LUNA) were effectively operated by the same organisation (if that is the correct word to use). The Luna Foundation Guard is responsible for both cryptocurrencies. On 28 May 2022, though, the link between the two was broken after LUNA investors voted to create a new blockchain, in an attempt to turn things around after the price of the crypto collapsed.
For the sake of clarity, we will refer to USTC as UST when we are talking about it before the relaunch of LUNA, but please remember that it is the same coin. Likewise, we will refer to what is now LUNC as LUNA when it was operating as Terra, rather than Terra Classic.
In the simplest terms, the difference is that UST is supposed to be a stablecoin, which means its price should be stable at $1, at least in theory. LUNA, on the other hand, is a regular cryptocurrency, which is subject to the ups and downs – recently, far more downs than you would expect to see – in a crypto coin or token.
UST came onto the open market in 2019, while LUNA started being openly traded the previous year. However, there is, as we have said, a link between the two of them. If we look at how UST and LUNA are supposed to work together, we can find out what went wrong.
LUNA and UST: How they are supposed to work
Part of the way in which UST was supposed to stabilise itself and keep at or very close to a value of $1 was linked to the price of LUNA. For instance, if LUNA was worth $20, then you should have been able to exchange your LUNA for 20 UST, because UST was, ideally, worth $1.
This concept also works the other way round, so you could have traded 20 UST for one LUNA because of the stablecoin’s presumed value. If, for some reason, UST were to drop below $1, then you could still buy $1’s worth of LUNA for one UST.
The idea, ultimately, is that rather than being backed by actual fiat cash, UST was an algorithmic stablecoin. It had a series of technological balances that helped it, until recently, keep level with the dollar. The main thing that, theoretically, helps to peg UST is LUNA itself. The idea is that, for every UST that was created, there was one fewer LUNA in circulation. This meant that LUNA was burned on a regular basis.
This was supposed to keep the price of UST at $1, while serving as an inflationary measure for LUNA. In other words, if there was less of a supply of LUNA that meant that there was theoretically more demand for the coin, which meant that the price should go up.
This means that people should ideally have kept hold of their LUNA. Because the supply of the coin was reduced as more UST was minted, there was the potential that a small amount of LUNA could be worth a lot of UST.
Let’s look at the example we had earlier. If LUNA was worth $1,000, and UST was worth $1, then someone could have burned just one LUNA and got 1,000 UST in return. But, if the price of LUNA dropped to $1, then that person could have spent their 1,000 UST in return for 1,000 LUNA at no extra cost to them. This meant that there would be more LUNA on the open market.
Now, the Luna Foundation Guard, led by the stablecoin’s co-founder, Korean entrepreneur Do Kwon, had a plan. That plan was, in effect, to stake UST, burn LUNA and see the price of LUNA go up and keep UST stable at $1. In the long term, the idea was that UST would become successful, LUNA’s price would rise to new heights, and everyone would be happy and rich.
How LUNA and UST fell
One other thing that UST is supposed to do is, in effect, pay interest to its holders. People who use the Anchor Protocol money market pay 19.5% rewards for people who stake the coin. Therefore there was the possibility of making a pretty significant return on any investment in exchange for not really doing very much.
In theory, you could borrow UST, get 19.5% interest and not do anything. This actually happened in 2021, when Degenbox, a program devised by Abracadabra Money, allowed people to deposit UST on Anchor Protocol in return for the MIM crypto. This program wound itself up a couple of months later, which (among other things) resulted in UST falling to a little below $1 and LUNA reaching a low of less than $45.
The reason, though, for the massive crash in May 2022 was that earlier in the month, the amount of UST deposited in Anchor fell as several major investors withdrew their TerraUSD. This meant that other people got worried and withdrew their UST too, causing a run, which, in turn, had an impact on the price of both cryptos, depegging UST and causing the price of LUNA to collapse.
The rapid collapse in the price of LUNA
LUNA, a cryptocurrency that had, up to 9 May, outperformed the bearish crypto market in 2022, collapsed in price in the space of a few days according to CoinMarketCap, going from an intraday high of $87.96 on 4 May to, on 12 May, what was then its all-time low of just over $0.0040.
The coin, which was the largest DeFi cryptocurrency in terms of market cap earlier this year, fell out of the top five and was ranked as the 267th largest crypto overall, a significant drop for a crypto that was once the world’s seventh largest. Things got even worse, with the coin sinking to less than a cent, and the production of blocks on the Terra blockchain was halted on 13 May.
LUNA eventually fell out of CoinGecko’s top 1,000 cryptos by market cap on its way to a new all-time low of $0.00001675.
Over the next few days, block production on the Terra blockchain was resumed and LUNA looked like it might have been making a comeback, reaching a high of $0.0007658 on 14 May. However, the price slid back down and 10 days later it was around $0.000166.
This was after Do Kwon set out a road map for recovery, calling for a hard fork that would see a new, community-owned form of LUNA, with no link to algorithmic stablecoins, and the original fork rebranded as Terra Classic (LUNC). The foundation behind terra was quick to alter the proposals with a brand new blockchain for the new LUNA. Voting on the proposal opened on 18 May and, on 25 May, the results were announced: 65.2% of the electorate voted in favour, 13.2% voted against and the rest abstained.
Then, at 06:00 UTC on Saturday 28 May, the split happened. The new Terra blockchain was launched and the new version of LUNA was released. Not long after it came out, it reached a high of $19.54 before crashing to a low of $3.63. The next day, it seemed to stabilise around the $5 mark, but on 30 May it experienced lows of $5.66 and highs of $11.97, closing the day at $10.71.
Since then, it has fallen down somewhat. As of 07:50 BST (UTC +1) on 31 May 2022, it was worth about $8.50. Just over 24 hours later, at 08:20 BST (UTC +1) on 1 June, LUNA was down again to $7.14. Over the next few days, the price kept dropping and reached a periodic low of $4.61 on 5 June.
After that, there were small signs of some kind of recovery and, at 08:05 BST (UTC +1) on 6 June 2022, it was worth about $5.11 before it slipped back down to stand at $4.35 24 hours later. The fall continued and, as of 09:45 BST (UTC +1) on 8 June, it was worth about $3.50, having reached an all-time low of $3.34 that morning. In the late hours, it collapsed further, to $1.96, before it recovered to $2.95 at around 15:40 BST on 9 June. On 12 June, things looked like they might be improving as it reached an intraday high of $3.41, but it soon fell back and, in the morning of 17 June, it was worth about $2.25. On 18 June, the new version of LUNA fell to its lowest price yet, $1.66, and by 15:00 BST on 24 June it had only recovered to about $1.95.
In terms of LUNC, when the new blockchain came out, it was worth about $0.00012. Over the next 24 hours or so the price fell down, reaching a low of $0.00007912 on 29 May, but on 30 May there was something of a recovery, with the coin reaching an intraday high of $0.0001778. After that, though, there was another downturn and, by 07:55 BST (UTC +1) on 31 May it was worth about $0.00012 again.
By around 08:30 BST (UTC +1) the following day, though, the coin had continued to drop and was trading at around $0.000107. There were more losses over the next few days, and at 08:05 BST (UTC +1) on 6 June 2022 it was valued at about $0.000082. There was more downward movement after that, though, and 24 hours later it was worth about $0.0000728. At 09:45 BST (UTC +1) on 8 June, it was down further to $0.000061. By about 15:40 BST (UTC +1) on 9 June, it was back up slightly to $0.0000696. Since then, though, it has gone back down and at around 10:24 BST (UTC +1) on 17 June, it was worth about $0.000059. The price dropped slightly by around 15:00 BST on 24 June, when it was worth about $0.0000589.
Keep in mind that before the crash, Terra (LUNA) had been seen as a well-respected cryptocurrency, with a Nasdaq article in 2021 declaring: “With an experienced leadership team, a clear white paper and several big backers, Terra has a lot going for it.”
The depegging of UST
Meanwhile, UST, which is supposed to stay at $1 no matter what, fell to a low of below $0.30 at one point on the morning of 11 May. It then continued falling, so that by 13 May it was worth just $0.1331.
To make matters worse, on 13 May, trading in both LUNA and UST was stopped by the Binance crypto exchange, even though it was later resumed. LUNA continued to fall, so that on 21 May, it reached a new all-time low of $0.05086. After the vote on the new form of LUNA, though, the coin showed some signs of recovery and even went above $0.10 briefly.
A day later the coin, which was due to be effectively abandoned by the Luna Foundation Guard, removed from its algorithm and backed by collateral from a reserve once the switch to the new Terra blockchain was complete, reached a new all-time low of $0.03525.
When the new blockchain was launched on Saturday 28 May, the newly-branded USTC was worth around $0.04. Later that day, though, its price sunk to its latest all-time low of $0.01846. Although it rose briefly, at around 07:30 BST (UTC +1) on 1 June, USTC had reached yet another all-time low of $0.01822.
Things got worse over the following days, with it reaching a further all-time low of $0.01454 on 2 June and, since then, what recovery there has been is small, with it standing at about $0.016 at 08:05 BST (UTC +1) on 6 June 2022. Early the following morning, it reached a fresh all-time low of $0.01451, before moving back up to be worth $0.01558 at 08:05 BST (UTC +1) on 7 June. In the early morning of the next day, there was yet another all-time low of $0.01196, before it re-emerged past $0.012 shortly afterwards to stand at about $0.0122 at 09:45 BST (UTC +1). At the start of 9 June, it dropped below the cent to yet another record low of $0.009257, before going back up to just over $0.01 by 15:35 BST (UTC +1). There were more and more lows after this, with the worst coming in the early hours of 17 June, when it fell to its latest all-time low of $0.006911. By about 10:25 BST (UTC +1), it was worth around $0.007415. The following day it reached yet another low, this time of $0.006218, but by about 15:00 BST on 24 June things had improved somewhat and it was worth $0.0157.
In short, Terra (LUNA) and TerraUSD (UST) are linked, but they are different things. UST is a stablecoin that is supposed to stay at $1 at all times, while LUNA was a regular crypto that is burned whenever new UST are minted. The problem of late has been that TerraUSD’s peg broke in May 2022, with no signs of a return to parity, causing LUNA’s price and reputation to collapse.
Whether the new LUNA blockchain can be a success, and whether the original crypto, renamed LUNC, can work remains to be seen. Meanwhile, we still do not know if plans to give what is now called USTC back to the community and collateralise it with a reserve will be a success, so perhaps it is best to wait and see what happens to both TerraUSD and Terra.
After recent events, if you are still thinking of investing in one of these cryptos, you should be extremely careful, do your own research, and know what you are getting involved in. Never invest more than you can afford to lose.