Image Source: PixaBay

What would need to happen before seeing one of the top 10 crypto coins crash? This is a question everybody, even lightly connected to the world of crypto, has asked themselves.

The trend of the past couple of days continues as we see the LUNA coin, and its stablecoin counterpart (UST), plummeting like crazy today. UST has lost nearly 70% of its value, and at the time of writing, LUNA is down 99% at $0.00001.

What is Happening to Terra?

To understand the crash that's happening to LUNA (LUNA-X), first, we need to take a look at what's happening with the UST (UST-X) stable coin.

UST is the stable coin created by the Terra ecosystem, and if I'm being honest with you, this stablecoin is having a pretty hard time staying stable these days. 

How Does The UST Stablecoin Work?

If we take a look at the Terra protocol, we will see that it has two main coins, UST and LUNA. UST is the stablecoin that keeps LUNA ticking.

This protocol works by letting its users burn LUNA in order to mint UST.  And, if you read the official documents of the protocol, you'll find that the process is easy to understand. 

UST doesn't work like most stablecoins such as USDT and USDC. Namely, the traditional way of working for stablecoins is linking the stablecoin to a Fiat currency or its equivalents.

Let's dive into some examples to better understand what's happening with the whole ecosystem:

• Let's say that the current price of UST is $1.01. So, UST holders can burn $1 worth of LUNA to get 1 UST, so they get a $0.01 profit from $1 worth of LUNA.
• On the other hand, let's say UST trades at $0.99. Now holders can swap 1 UST for $1 worth of LUNA, resulting in a $0.01 UST profit.
• In conclusion, this means that the bigger the difference between USD and UST, the better the transactions for swapping would be. If, in theory, the price of UST crashed, holders could swap their UST for LUNA and sell it for a bigger profit.
• However, all of this means that the market cap of UST must be lower than that of LUNA. If the opposite of this happens, it would mean that Terra could disallow its users to redeem $1 worth of LUNA for 1 UST.

This was only hypothetical until earlier this week.  And now, it's becoming this nightmare that everyone is trying to run away from.

The landslide began as a result of certain events which unfolded in and around the Terra ecosystem. This is what the UST/USD chart looks like at the time of writing. You can notice where the "events" started unfolding.
 

(Click on image to enlarge)

Image Source: TradingView

On May 13th, the price of UST was astronomically lower, down to $0.14, losing more than 70% of its value. This shouldn't be happening to what's meant to be a stablecoin!

Here's the LUNA chart for comparison.
 

(Click on image to enlarge)

Image Source: TradingView

LUNA's price fell to $0.00002, which is a whopping 98.9% loss of its value. To get things into perspective, LUNA's ATH price was $119.18.

Terra's CEO came out with a tweet trying to explain what's happening and the next steps they will be taking to stop this unprecedented downfall. Here's what he had to say.
 

On May 10th, "Do Kwon" (Terra's CEO) announced that they are close to coming up with a recovery plan.
 

Close to announcing a recovery plan for $UST. Hang tight.

— Do Kwon 🌕 (@stablekwon) May 10, 2022

Conclusion

Everything could get back to normal (as normal as it could be after all of this), but Do Kwon and the Terra community must try and get the UST price back to its intended values.