A brief overview of Terra:
This project has its own blockchain, which has a high processing speed for information and transactions, and is quickly becoming one of the top projects in the market. In addition, this blockchain has stablecoins called Luna and UST.
The relationship between Terra’s stablecoins and Luna is regulated based on the expansion and contraction mechanism. Think of the entire Terra economy as two pools; one for Luna and the other for Terra classic. To maintain the price of Terra, the supply of Luna is increased or the supply of Terra is decreased. Users must burn Luna to mine Terra, and Terra is burned to mine Luna.
Expansion: When the price of Terra is high relative to its backing, the supply is low and demand is high. In this case, the protocol incentivizes users to burn Luna and produce stablecoins. New Terra supply enlarges the pool, proportional to supply and demand. Users burn Luna to produce new stablecoins until Terra reaches its target price. During this process, the Luna pool shrinks, and its price increases.
Contraction: When the price of Terra drops relative to its backing, the supply is very high, and demand is very low. The protocol incentivizes users to burn Terra and produce Luna. Decreasing the supply of Terra leads to scarcity and an increase in Terra’s price. The production of Luna from burning continues until Terra reaches its target price. The Luna pool enlarges, and its price decreases.
Luna can be considered as the stablecoin’s counterpart to the stable asset, Terra. By adjusting the supply, the price of Luna increases with demand for stablecoins.
How Terra project fell:
The UST stablecoin algorithm lost its rate parity during an attack, and the panicked rush of individuals to convert UST to Luna coins disrupted the price stabilization mechanism, resulting in an increase in circulation of Classic Luna coins in the market, and everything collapsed within 5 days. The project team was forced to shut down the network.
Afterwards, rumors spread about the CEO of the project selling large amounts of the Luna currency prior to the collapse of the project.
Afterwards, Do Kwon went into hiding and recently news of his arrest in Montenegro with fake identity documents has emerged.