Crypto Crash of 2022: The Failure of TerraUSD and Luna Demonstrates Need for Price Stability

• In November 2020, a third-party audit conducted by JS Held revealed that the Luna Foundation Guard (LFG) had spent $2.8 billion in crypto in May to defend the peg of the algorithmic stablecoin TerraUSD (UST).
• Terraform Labs (TFL), the developer of the Terra blockchain, spent $613 million defending the peg.
• In 2022, the collapse of the TerraUSD (UST) and Luna (LUNC) coins led to the cryptocurrency crash in the second quarter of that year.

In November 2020, a third-party audit conducted by JS Held revealed that the Luna Foundation Guard (LFG), an entity behind the now-defunct Terra ecosystem, had spent $2.8 billion in crypto in May to defend the peg of the algorithmic stablecoin TerraUSD (UST). Furthermore, Terraform Labs (TFL), the developer of the Terra blockchain, spent an additional $613 million defending the peg. These events demonstrate the importance of price stability when it comes to cryptocurrencies, and the need to create effective mechanisms to protect investors from extreme price volatility.

The creation of the TerraUSD (UST) stablecoin and the Luna coin in 2019 was an attempt to solve this problem. By linking the two coins, UST and LUNC, Terraform Labs hoped to provide a decentralized alternative to traditional fiat currencies, which are pegged to reserves such as gold. However, this system relies on the stability of the Luna coin, and when its price became destabilized in May 2022, it had a significant impact on the value of UST as well. This in turn led to the collapse of the entire stablecoin system in the second quarter of 2022, causing a cryptocurrency crash in the process.

The failure of TerraUSD and Luna to maintain their peg is a reminder of the need for effective mechanisms to protect investors from extreme price volatility. It is also a reminder of the importance of price stability in the cryptocurrency market, as unstable prices can have a ripple effect that can lead to the collapse of an entire system. As such, it is essential for developers to create systems that are robust and resilient, so that investors can feel secure in their investments.