Luna: The People's Crypto

People invested in Luna, the native token of the Terra blockchain, for a variety of reasons. Luna's value rose from less than $1 in early 2021 to over $100 in 2022, creating many crypto millionaires and prompting stories in the media about regular people getting rich from Luna. Luna's holders were granted governance rights and voting power for the protocol, and it was largely impervious to market volatility, falling less and recovering faster than its peers. The team behind Terra was also well-liked, and the Terra blockchain underpins a decentralised finance (DeFi) ecosystem that creates algorithmic stablecoins. Stablecoins are frequently used in DeFi applications like lending or borrowing, and are designed to hold steady. However, it's important to note that cryptocurrencies are generally considered volatile, speculative investments, and financial experts warn against investing more than you can afford to lose.

People believed in the team behind Luna

Luna, the native token of the Terra blockchain, was created by start-up Terraform Labs and its co-founders Do Kwon and Daniel Shin in 2018. The blockchain underpins a decentralised finance (DeFi) ecosystem that creates algorithmic stablecoins. Stablecoins, or cryptocurrencies pegged to reserve assets like the U.S. dollar, are frequently used in DeFi applications such as lending or borrowing.

Matt Hougan, chief investment officer at Bitwise Asset Management, said: "People love the team behind Terra, and they love all the various applications being built on it right now."

Terraform Labs created the UST coin to be an algorithmic stablecoin on the Terra network. While other stablecoins (USDC or Tether) are fiat-backed, the UST would not be backed by real assets. Instead, the value of UST would be backed by its sister token, Luna.

The Luna token had four different roles in the Terra network: a method to pay for transaction fees, a mechanism for maintaining Terra's stablecoin peg, staking in Terra's delegated proof of stake (DPoS) to validate network transactions, and participation in the platform's governance.

Luna's performance may correspond with that of Terra's stablecoins. If Terra's stablecoins are unable to hold their pegs, investors could be subject to losses.

The Terra blockchain has attracted some of the biggest names in venture capital, including Lightspeed Venture Partners and Coinbase Ventures.

Luna was a native token of the Terra blockchain

• A method to pay for transaction fees in the Terra network.
• A mechanism for maintaining Terra's stablecoin peg.
• Staking in Terra's delegated proof of stake (DPoS) to validate network transactions.
• Participation in the platform's governance by adding to and voting on proposals when it comes to changes in the Terra network.

Luna's holders were granted governance rights and voting power for the protocol, as it was Terra's native token. However, investors should be aware that Luna was also used to regulate Terra's stablecoin pegs, which meant that Luna was "in the centre of the shock absorption process if something went wrong with the stablecoins on the Terra platform", according to Matt Hougan, chief investment officer at Bitwise Asset Management.

Luna's performance may have corresponded with that of Terra's stablecoins. Although Terra's stablecoins, including the dollar-pegged UST, were performing well, it was impossible to predict their future performance and whether they would be able to withstand high volatility or a bear market.

Luna was going for around $116 in April and ended up dropping to a fraction of a penny before being delisted. Before that, the coin went from being worth less than $1 in early 2021 to creating many crypto millionaires within a year. This led to Kwon's cult hero status among some retail crypto investors.

Luna was used to regulate Terra's stablecoin pegs

Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. Stablecoins are assets pegged to the price of a single asset, typically a fiat currency such as the US dollar. The first generation of stablecoins, such as Tether, maintain their price using a basket of assets, including fiat reserves.

Terra's stablecoins, including TerraUSD (UST), were algorithmic stablecoins. This means they aimed to maintain their pegs using a coin called LUNA. UST stablecoins were not backed by US dollars but were designed to maintain their peg through a complex model called "burn and mint equilibrium". This method uses a two-token system in which one token is supposed to remain stable (UST), while the other (LUNA) is meant to absorb volatility.

LUNA was used to regulate the pegs of Terra's stablecoins by acting as a counterweight to reduce the volatility of UST. LUNA was also a governance token, granting holders voting power over the protocol. The LUNA-UST protocol was based on two main concepts. Firstly, the protocol stabilised UST prices by ensuring that its supply and demand were in equilibrium through arbitrage. Secondly, through the Terra protocol's algorithmic market module, arbitrageurs were allowed to trade $1 worth of LUNA for 1 UST, and vice versa, regardless of LUNA and UST prices.

LUNA's role in regulating Terra's stablecoin pegs meant that it was at the centre of the shock absorption process if something went wrong with the stablecoins on the Terra platform. This was a risk for investors as they could be subject to losses if Terra's stablecoins were unable to hold their pegs.

Luna was seen as a safe haven in the crypto space

Luna was the native token of the Terra blockchain, which underpins a DeFi ecosystem that creates algorithmic stablecoins. Luna had four roles in the Terra network: it was a method to pay for transaction fees, a mechanism for maintaining Terra's stablecoin peg, staking in Terra's delegated proof of stake (DPoS) to validate network transactions, and participation in the platform's governance.

The Luna token skyrocketed about 135% in less than two months until its peak in April 2022. The largest incentive was that you could stake your UST holdings on the Anchor lending platform for a 20% annual yield. Many analysts felt that this rate was unsustainable. The Anchor Protocol was a decentralised money market built on the Terra blockchain. This platform became popular for its aforementioned 20% yield for UST holders who deposited their tokens on the platform.

Luna's performance may correspond with that of Terra's stablecoins. While stablecoins are supposed to be stable, they can be vulnerable to runs if they are backed by assets that may lose value or become illiquid in times of stress.

Luna's price soared in the months leading up to its crash

Lunas' price soared in the months leading up to its crash. The Luna token skyrocketed about 135% in less than two months until its peak in April 2022. The token started the year priced below $1 and reached an all-time high of $119 in April. The cryptocurrency was up over 23% in the last seven days, according to CoinGecko.

The biggest incentive for investors was the Anchor Protocol, a decentralised money market built on the Terra blockchain. The platform offered a 20% annual yield for UST holders who deposited their tokens. At one point, as much as 72% of UST was deposited in Anchor because the platform was the primary driver of demand for Terra.

The Luna token also benefited from the wider success of the Terra blockchain. Terra recently became the second-largest DeFi protocol behind Ethereum, with nearly $18 billion in total value locked, according to data provider DeFi Llama.

"Terra is the hot dot among the cool kids in crypto right now," said Matt Hougan, chief investment officer at Bitwise Asset Management. "People love the team behind Terra, and they love all the various applications being built on it right now."

The success of Luna was also driven by the wider hype around cryptocurrencies. The crypto community was still reeling from the success of Bitcoin, which had soared in value in the preceding years. Many investors were looking for the next big thing, and Luna seemed to fit the bill.

However, the hype around Luna was not based solely on speculation. The token had several unique features that made it attractive to investors. For one, it was the native token of the Terra blockchain, which meant that it had a number of important functions within the ecosystem. Luna was used to pay for transaction fees, maintain Terra's stablecoin peg, and participate in the platform's governance.

Additionally, Luna was designed to be a stablecoin, which are supposed to be less volatile than other cryptocurrencies. Stablecoins are pegged to the value of a fiat currency, such as the US dollar, or to the price of a commodity like gold. This relative stability makes them attractive to investors looking to hedge against the volatility of the crypto market.

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