One of the biggest crypto losers this week was Terra (Luna), which fell by as much as 20% on Friday in a single session. The three-day loss stands at 27%. This decline in Terra came even as Cosmos (ATOM) also suffered a decline in double-digits.
The sudden downward trend witnessed is ascribed to the recent FUD move on TerraUSD (UST). This bout of fear, uncertainty, and doubt has stemmed typically from the deliberate move from the market that has spread negative opinions about this asset.
In one instance, an enormous whale in the crypto market dumped $285M worth of UST in the market on 7-8 May 2022. This sheer volume of the exit of UST threw this token of the standard equal peg (1:1) with the USD, pushing it to $0.98.
The LUNA’USD paid to hit a low of $61 after the drop between 7-8 May. It was the worst level in 3 months. This selloff resulted in UST even briefly losing its US dollar peg, touching the low of $0.98.
The Excessive Supply Of LUNA
LUNA stands as the collateral asset and maintains the UST dollar peg. Thus, when the value of UST crosses $1, the protocol of Terra incentivizes every user to mint UST and subsequently burn LUNA.
Conversely, when there is a drop below $1 in UST price, this protocol rewards the users for minting LUNA and burning USTs.
Thus, during a reduction in UST supply, the valuation should witness a decline. And conversely, when there is an expansion of UST supply, the valuation witnesses increase.
The UST market contracted for the first in 2 months and dropped by 28.1M below 0. At the same time, the supply of LUNA expands and reaches 436.75 above zero.
This excessive sustained daily supply against the lowering of stable market demands is believed to have pushed the price lower.