Luna was not on Terra Firma — The Crypto Crash

Given Luna’s dramatic collapse, I wonder if my daughter’s name will trigger some PTSD in the crypto community?

Today’s WSJ discusses the crypto-crash catalyst, from the algorithmic stablecoin pair Luna/TerraUSD:

“The collapse saddled investors with billions of dollars in losses. Luna lost nearly $20 billion in value as it surrendered nearly all its value in just a few days.

It ricocheted back into other cryptocurrencies. Luna acts as a shock absorber, buffering TerraUSD from volatility. The system works only if traders actually want Luna. Investors did not want Luna when TerraUSD lost its peg this week. They sold Luna in a panic.

“I understand the last 72 hours have been extremely tough on all of you,” Mr. Kwon tweeted on Wednesday, addressing his followers, who are known as “Lunatics.”

He co-founded a nonprofit called Luna Foundation Guard and announced earlier this year that it would buy up to $10 billion in bitcoin. Terraform Labs donated several billion dollars worth of Luna to seed the reserve fund.

By Tuesday, the fund had largely depleted its $3 billion in bitcoin and other cryptocurrency resources amid an emergency effort to salvage TerraUSD. The fund’s selling contributed to a sharp drop in bitcoin’s price.

Social-media forums devoted to $Luna and $TerraUSD have been filled with posts by investors upset about losses and debating whether Mr. Kwon can spearhead a turnaround.

Cryptocurrencies thrive on social proof: Seeing other people using and valuing it can burnish its credibility. Terra and its mechanisms may ultimately be a more accountable, more transparent or more equitable version of what monetary authorities do. Regardless, it still requires some of the same faith that a so-called fiat currency does. Calling Terra some kind of scam understates its ambition. It was trying to do no less than reinvent the wheel.

A new father, Mr. Kwon named his infant daughter Luna, writing in a tweet after her birth last month: “My dearest creation named after my greatest invention.”

Stablecoins are a pillar of crypto’s parallel financial system. Crypto enthusiasts need to maintain a link to the government-backed currencies of traditional finance, where rent is due, cars are bought and bills are paid. But they want to trade and invest in cryptoland only, not in dollars or euros or pounds. So stablecoins act as a kind of reserve currency, an asset whose value everyone understands—and that shouldn’t change. Professional traders and individual investors alike use stablecoins, and had stashed around $180 billion in them as of Tuesday.

This is how the stablecoin is supposed to work: If TerraUSD’s price dips below $1, traders can “burn” the coin—or permanently remove it from circulation—in exchange for $1 worth of new units of Luna. That should reduce the supply of TerraUSD and raise its price.

Conversely, if TerraUSD climbs above $1, traders can burn Luna and create new TerraUSD. That should increase supply of the stablecoin and lower its price back toward $1.

In theory, that means traders can make money when TerraUSD falls below $1 because they can buy the stablecoin at its depressed price and convert it into $1 of Luna. The idea is that the collective efforts of traders around the world keep TerraUSD in line with its dollar peg”

“Luna was not on Terra Firma” — another WSJ headline today.