Terra Blockchain Officially Halted: What Went Wrong?

The LUNA cryptocurrency platform has announced that it has temporarily halted its blockchain to prevent transactions after the token’s price dropped by 100% overnight. Since the crypto’s price is extremely low, it is vulnerable to an attack. In another announcement, Terra stated that validators are working to restart the network.

The statement came after Terra’s native token, LUNA plummeted to less than a penny on May 12th. At the time of writing, TerraUSD is trading at $0.10, whereas LUNA is at an all-time low of $0.000014.

How Did the Terra Blockchain Crash?

Basically, stablecoins are cryptocurrencies that have low volatility. They are generally pegged to a currency or a commodity such as silver or gold. In the case of Terra, the stablecoin is pegged to the US dollar at a 1:1 ratio.

TerraUSD’s value is derived by complex algorithmic processes, linked to another paired token called LUNA. When the price of UST drops below $1, traders can burn UST—removing it from circulation—and raise the price back up.

UST prices started to deviate from last weekend as the uncertainty around inflation was affecting the crypto-industry. Moreover, the sell-off of $150 million UST on Curve Finance and $84 million UST on Binance created panic and outrage among the token holders. The Anchor Protocol, a lending protocol on the Terra network, witnessed $5 billion in UST withdrawals. The Anchor (ANC) is down 70% in one day, having declined from $0.85 to $0.20.

Binance, one of the largest cryptocurrency exchanges, has halted the trading of both LUNA and TerraUSD.

Aside from the reasons mentioned above, there are numerous theories about Terra’s downfall. To begin, there is widespread speculation in the crypto community about a coordinated attack in which one attacker sold $285 million in UST. Second, Citadel is also under the radar because many believe the multinational hedge fund borrowed $100,000 in Bitcoin and used it to short UST. Lastly, there are rumors that Jump Capital, a Terra supporter, is planning a $2 billion bailout package.

Terra’s founders and the Luna Foundation Guard (LFG) have stepped in to control the free fall of their stablecoins and crypto. LFG announced in a series of tweets that it will lend $750 million in Bitcoin (BTC) to over-the-counter (OTC) trading firms and other market makers on the condition that they repurchase it as soon as market conditions improve. Last week, the LFG foundation purchased $1.5 billion worth of Bitcoin, bringing its total Bitcoin reserve to $3.5 billion.