The day cryptocurrency, LUNA collapsed to $0: highlighting the difference between Bitcoin and other cryptocurrencies

The collapse of LUNA, the native token of the Terra blockchain, is one of the most dramatic events in cryptocurrency history. The downfall began in May 2022, when the algorithmic stablecoin TerraUSD (UST), which was supposed to be pegged 1:1 to the US dollar, lost its peg.
 

UST was designed to maintain its dollar peg through a complex mechanism involving LUNA. When UST’s value fell below $1, users could burn UST to mint an equivalent amount of LUNA, and vice versa, to restore the peg. However, this system failed catastrophically when a large amount of UST was suddenly sold off, leading to a loss of confidence and a bank run on the coin.
 

The Luna Foundation Guard (LFG), which managed the Terra ecosystem, had amassed a large reserve of Bitcoin to defend the peg. In a desperate attempt to stabilize UST, LFG used these reserves to buy UST, but this only led to a massive increase in the supply of LUNA, causing its price to plummet.
 

Within a week, the market capitalization of LUNA collapsed from billions to near zero, wiping out the investments of countless individuals and shaking the entire crypto market. The event raised serious questions about the viability of algorithmic stablecoins and the oversight of decentralized financial systems.
 

The LUNA collapse serves as a stark reminder of the risks inherent in the cryptocurrency market, particularly in projects that rely on complex algorithms and investor confidence to maintain stability. It also underscores the difference between Bitcoin and all other cryptocurrencies.