The consequences of the collapse of Luna. How has the market changed and what will happen next

Posted 14 July, 2022

The story with LUNA continues to develop, but the crypto community can already draw some conclusions about how this collapse affected the attitude to the situation in the sector. In this article, we have divided the changes that have occurred into several categories. First, we will talk about changes in the understanding of the processes taking place with the sector, in the second part we will touch on conclusions and recommendations regarding market mechanisms and technologies.

 

Large projects do not die, but evolve

 

The first and most important realization of what happened after the LUNA story is that projects with a large and developed ecosystem do not disappear even if the price of their asset is "reset". The LUNA ecosystem was one of the leaders in the number of smart contracts written for the project, second only to Ethereum.

The increase in the value of LUNA, which stopped at around $ 120 per coin, was replaced by a rapid drop after the UST was detached from the dollar exchange rate. As a result, today LUNA Classic costs hundreds of times less than a cent, and the newly created LUNA 2.0 asset is trading around $1.8. Despite everything, the development of the program code of all existing network projects has value and can be changed fairly quickly and on a budget, if necessary, to restart platforms according to new formulas and further evolution of the ecosystem.

The crypto sector takes into account not only the rules of the market, but also the rules of the community
The crypto space does not function exclusively according to the laws of the market. Users who bought millions and billions of LUNA at a meager price had to reckon with the opinion of the existing LUNA community, which wanted to make a fork by creating a new LUNA 2.0 asset and turning the original LUNA asset into LUNC Luna Classic, thereby, as it were, "pinching" most of the value of the original network.

The newly minted "millionaires" of LUNA had a choice: either sell the asset that had risen in price thousands of times immediately after the rebound from the bottom and before the fork, or store their coins to receive an airdrop of coins of the new network, realizing that priority in such a distribution would still be given not to them, but to users who owned LUNA before the start UST collapse stories.

 

If a major project falls, the whole market falls


The events related to the collapse of the LUNA ecosystem and their consequences suggest that the crypto market will continue to periodically expect sharp global falls, since the rapid collapse of any major project causes the entire sector to fall. Considering that there are many system-forming projects, and all of them, despite audits, are more or less experimental, the probability of such events increases.

The fall of the entire market following one project occurs for several reasons. Firstly, a lot of users begin to leave the market, having lost confidence in the technology as a whole, the so-called panic sell happens. Secondly, any large asset is always represented on DeFi platforms, as well as in the form of price equivalent tokens outside its own network.

The rapid fall in the exchange rate of the main asset in this case can cause damage to other networks, calling into question the correctness of the formulas of many projects and their stable functioning. Difficulties in working at such a moment can also be experienced by numerous bridges, which allow transferring assets from one network to another.

Last but not least, the general decline is influenced by the fact that many projects and funds in the sector mutually invest in each other and own large shares of all coins circulating on the market. Movements and especially sales of such large stocks do not go unnoticed by on-chain analysts, and once in the news feeds negatively affect the already falling asset price.

 

Increased risk of assets outside the main network and Wormhole assets

 

Users who had LUNA on their balances outside the wallets of the main network or exchanges that supported the fork turned out to be more vulnerable to the crisis. The token of the new LUNA 2.0 network was credited in greater numbers to those LUNA holders who purchased an asset earlier than a certain date on the exchanges that supported the fork or became its holder in the main network.

Thus, the owners of LUNA in other networks were not counted as candidates for the initial distribution of coins of the new network. The official appeal of the developers stated that users wishing to receive airdrop should have time to transfer their coins to the main network.

Even after learning about the fork and transferring their coins to the main network in time, LUNA holders in other networks would not be able to receive new tokens according to the favorable airdrop formula, since in the main network the tokens on their balances appeared later than the date of May 7, which was the time stamp for receiving a larger airdrop.

It is also always important to take into account the probability of the human factor. For example, LUNA holders in other networks might not have time to react quickly to the situation at all and miss the airdrop as a result of the fork due to lack of time to transfer tokens to the native network.

Despite some concern of LUNA owners outside the main network, the developers state that LUNA balances in all known large networks meet the conditions of airdrop and the distribution of new coins for them will be carried out later. However, the terms and date of the additional distribution are still unknown.

 

Devertification and trust, but check

 

It is noteworthy that the UST stablecoin, working in tandem with LUNA, had rather a good reputation before the problems began. Many analysts and enthusiasts of the crypto space liked the fact that UST was a decentralized stable, as well as a stable completely independent of the availability of real dollars in reserves.

For this reason, many analytical channels and resources mentioned UST along with DAI as recommended alternatives to centralized USDT and USDC labels. It is not easy to find a channel or resource that has not mentioned UST and LUNA at least once in a good light in recent years and thus has not tarnished its reputation. Nevertheless, critical materials about UST technology were sometimes encountered, one of them was a Coindesk article published just a few weeks before the destruction of the "stable".

It is also interesting that many projects that use algorithmic price binding (for example, TOMB and its clones) are openly recognized by many as being deliberately doomed to detach prices with a subsequent dead loop. The stability of UST, however, was rarely questioned by the community for some reason.

The UST story also brought the already extreme understanding of diversification for the crypto sector to a new level. Now users are trying to diversify and "stable" crypto dollars.

 

Uncertainty. What awaits LUNA users next?

 

The price of new and old LUNA tokens has not yet stabilized, and some exchanges have not yet unfrozen all the tokens of the new LUNA and have not opened markets. The fate of LUNA holders in other networks is not fully understood.

The vector of development of the LUNA ecosystem projects also remains uncertain, namely, whether they will support both tokens or only one and how they will make the choice. At the moment, some platforms already support both tokens — you can provide liquidity to the pools of the Astroport platform with different conditions, for example, using the assets of both networks by simply switching the Terra Station browser extension between the Main and Classic modes.

Special attention should also be paid to the further fate of UST classic, which has turned from a stablecoin into a speculative asset with huge volatility. Especially interesting will be the ways to use this asset, which the community will certainly come up with over time. For example, at the moment UST classic is already often used to pay network commissions.

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