The global cryptocurrency market has been shaken up by the freefalling prices of South Korean-made cryptocurrency terraUSD, also known as UST, and its sister token luna, raising concerns that it may lead to the crypto market’s version of the Lehman Brothers collapse.
According to crypto market analysis website CoinMarketCap, the prices of terraUSD and luna recorded 857 won ($0.66) and 443 won as of 2pm on May 12, down 14 per cent and 96 per cent from 24 hours before, respectively.
Terraform Labs, established by Korean engineer-turned-CEO Do Kwon, developed both cryptocurrencies and is in charge of issuing them. The price of luna once reached over 150,000 won last month to crack the list of top 10 cryptocurrencies with the highest market capitalisation in the world.
A so-called “stablecoin”, UST is meant to maintain a one-to-one peg with the US dollar. It uses a complex combination of code, trader incentives and smart contracts to control supply and stabilise prices.
If the price of UST falls below $1, investors can deposit UST at Terraform Labs and receive $1 worth of luna to earn profits of up to 20 per cent in return. In this case, the distribution volume of UST gets reduced to allow the price to go back up to $1.
The algorithmic mechanism of the two cryptocurrencies hit a wall as the global crypto market sentiment recently worsened with the struggling prices of bitcoin. The weakening market led to sell-offs and the price of UST eventually slid below $1, resulting in a drop in the price of luna.
Citing analysts at research firm Fundstrat, Markets Insider said the dramatic drop in terraUSD and luna is a “death spiral” that could see confidence in the stablecoin evaporate entirely.
Bloomberg noted that comparisons with the 2008 financial crisis have started to roll in.
“Hallmarks of shadow banking, such as circular market mechanics and extremely high leverage, are readily visible among Terra’s ecosystem, something that academics fear could create a second, digital wave of failed lenders and wiped-out savings,” it said.
South Korean crypto exchanges including Upbit and Bithumb have issued a warning for investors to take caution when trading Terraform Labs’ cryptocurrencies.
THE KOREA HERALD/ASIA NEWS NETWORK