The amount of LUNA Tokens became hyperinflation, the Terra blockchain had to be suspended

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2022-05-14 20:38:27

The supply of LUNA in the market increased rapidly in just a few days, reaching trillions in the last 24 hours. Terraform Lab has to suspend the operation of the Terra blockchain.

Hyperinflation of the LUNA . token

The fall of LUNA is not over yet as the token has lost more than 99% of its value in just one month. LUNA is already almost a “dead token”. The volume of Luna tokens minted has skyrocketed in just a few days. Currently, the total circulating supply has reached 6.5 trillion tokens.

The amount of LUNA tokens skyrocketed

LUNA is the token used to help UST achieve a 1-for-1 anchor to the dollar. If the UST price exceeds $1, 1 dollar worth of Luna tokens will be burned and exchanged for 1 UST. This is a key factor that helped push Luna’s price up during its record rally earlier this year.

Until this market volatility, UST de-peg and lost a key anchor. At one point in the week, the stablecoin was trading at just $0.57. Therefore, instead of selling on the market, UST holders are attempting to withdraw funds through LUNA using a mechanism designed to keep the peg in place. When this happens, more Luna is minted in response to the amount of UST burned.

When the price of LUNA is high, say $100, if you exchange 1 UST for $1 worth of LUNA tokens, you will only get 0.01 LUNA. Therefore, such swaps will not increase Luna’s supply by much. However, now the price of Luna has dropped by 99.9% in value and the large volume holders are withdrawing their cash. This caused Luna’s supply to increase significantly. For example with the price of LUNA of $0.10, exchanging 1 UST you will get 10 LUNA. So, if someone wants to swap a large amount, say 100,000 UST, that will result in minting 1 million LUNA. Currently, the LUNA token value reaches $0.007 which means that the supply has increased exponentially.

When holders exchange UST for LUNA tokens, they contribute to an increase in the supply and potentially sell these tokens on the market. This caused the price of Luna to drop even further. The next person to make a trade in exchange for UST will generate more LUNA and cause an even greater downward force in the market. It also leads to an exponential increase in supply. In just a few days, the supply of LUNA increased from 300 million then to 700 million, then 7 billion and to now 6.5 trillion tokens.

see more: Terra’s Days of Disaster

Currently Terraform Labs is backing a number of proposals to try to save the ecosystem. One will increase the amount of UST that can be swapped for Luna per day by four times. Terraform Labs is also promoting proposals that could burn 1.39 billion UST in the hope that this can reduce pressure on the system as a whole.

Terra’s TVL takes heavy damage

The volume of TVL in the Terra ecosystem dropped sharply

Once the blockchain with huge TVL volume, Terra has now lost more than 80% of TVL. On January 1, Terra had a TVL of about $18.4 billion, and this dropped to about $1.65 billion on May 11, 2022.

Many believe that Terra TVL crashed this week as dApps in its ecosystem sank to new lows.

Decentralized lending and borrowing platform Anchor, for example, has fallen by more than 92% in the last month, while staking platform Lido has also lost over 98% of its TVL over the same period. Automated DEX protocols Astroport and TerraSwap have lost more than 90% and 80% in TVL, respectively.

Other projects that have contributed to the drop in total locked value include, but are not limited to, Mirror, Pylon Protocol, Mars Protocol, Risk Harbor, Spectrum Protocol, Aperture Finance, Stader, Loop Finance and PRISM Protocol.

Blockchain Terra is temporarily closed

Validators for the Terra blockchain decided to shut down the network on Thursday (May 12) in a move designed to prevent governance attacks after the LUNA price dropped by more than 99%.

The official Terraform Labs Twitter confirms that the blockchain network has been halted at a block height of 7,603,700. This announcement comes after a conversation in Terra’s Discord suggested that the blockchain should now be down and up and running again when staking is disabled. The purpose of discontinuing staking is to avoid future attacks.

The tweet announcing the suspension

A day ago, the liquid staking service provider Lido Finance also warned about the risk of system hacking. Accordingly, the cost of the network admin attack dropped sharply, after the price of LUNA plummeted.

However, the block production downtime did not last long, Terra subsequently announced a network restart shortly after the validator applied the patch to disable other authorizations.

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