LUNA-UST death spiral: Is it time for Terra to accept its demise?

Lavina Daryanani
Source: Live Science

The Terra ecosystem is quite chaotic at the moment. Right from investors and traders to the founder and developers, almost everyone is in a state of bafflement. The rescue operation has been going on in full swing, yet the nail is far from being hit on the head.

Around 10-hours back, Terra’s blockchain was halted at a block height of 7603700. The validators had decided to do so to prevent governance attacks following severe LUNA inflation. Right after that, validators released a patch and the Terra blockchain had resumed block production. Delegations, however, remained disabled even post the chain went live with the new code merge.

A couple of hours back, the Terra blockchain was again officially halted for the second time, at block 7607780. The team’s official tweet noted that the validators had done so to “come up with a plan to reconstitute it.”

State of LUNA

The supply of LUNA has only been ballooning up of late. Yesterday, around this time, over 1.46 billion tokens, were in circulation. However, during the early hours of Friday, the number was already up to 6.5 trillion. Meanwhile, the token lost more than 99% of its value and was worth merely $0.008824 at press time.

Alongside, exchanges had started cutting their ties with LUNA. Binance, for instance, removed and ceased the trading of a host of spot pairs. The BUSD and UST pairs were the only tradable pairs at press time.

Should you have seen this coming?

Well, Terra was quite outright about its tokenomics since the beginning. The masses, however, turned a blind eye towards the red flags and were quite content with the whole burning-minting mechanism. In fact, at one point, comparisons were even being made that LUNA would become deflationary, and would follow the footsteps of Ethereum.

In fact, when questions about abnormal gains had to be raised, they weren’t. Investors had started taking things for granted and eventually had to bear the repercussions. Talking about the same in a recent blog post Arthur Hayes outlined,

“The protocol is working as it should, the fact that people are surprised at what is happening means they did not properly read the whitepaper.”

He however went on to assert,

“Terra is currently in the deepest darkest depths of the death spiral.”

Per Hayes, the spiral would cease when the UST market cap equals that of LUNA. If left to do its thing, the protocol would eventually find that market cap equilibrium. In such a scenario, what would the final resting market cap be? And most importantly, when fresh LUNA is created by arbitrageurs buying cheap UST, who would even buy that LUNA?

Highlighting the harsh reality of the situation, Hayes questioned,

Why would you buy LUNA from those selling it when you know there is billions of dollars of LUNA sell pressure created programmatically as long as UST < $1."


Concepts like ‘death crosses’ have always been topics of discussion among people from the crypto space. However, at this point, it sure does look like LUNA is literally being crucified on the cross and is on the verge of dying. Or wait, is it dead already?!

Well, wisecracks aside, for LUNA and UST to survive this episode, some pretty strong protocol changes ought to be made. Only then would it be able to regain market confidence and remain sustainable over the long run.

So, if at all a genius plan is indeed come up with, then we’ll definitely witness a resurrection episode and the crypto community would, perhaps, have its own Easter to celebrate!