Last week, the Terra (CRYPTO: LUNA) blockchain effectively collapsed. It started when the ecosystem's stablecoin, TerraUSD (CRYPTO: UST) , lost its peg to the U.S. dollar. At that point, the built-in arbitrage mechanism -- which uses the Luna coin to control stablecoin volatility -- should have resolved the problem. But it didn't.
Next, the Luna Foundation Guard, a nonprofit group created to support the Terra ecosystem, used its $3 billion Bitcoin (CRYPTO: BTC) reserve to buy TerraUSD. The goal was to restore the peg by creating demand for the stablecoin. That was the failsafe. But it didn't work either.
Instead, as the stablecoin continued to plunge, panicked investors began to bail on the entire project, selling both TerraUSD and Luna. One week later, both coins were essentially worthless, and $42 billion had been erased. But some investors fear the worst is yet to come. If people lose faith in decentralized finance (DeFi) or crypto in general, the ripple effects from Terra could devastate the entire industry.
For further details see:
2 Top Cryptocurrencies to Buy and Hold After the Terra (Luna) Crash