Crypto month at a glance: Terra's black swan event ruled the market

economictimes.indiatimes.com:

Luna, a top 10 coin crashed to nothing. Other altcoins continued to feel the pain. Luna was a layer-1 platform that focused on DeFi (Decentralised Finance) protocols with its algorithmic stablecoin UST. Stablecoins are cash equivalent in the crypto space and often backed by either fiat currency (USDT) or crypto (DAI). They are crucial in most DeFi protocols. UST did not have any collateral and maintained its 1 dollar value with the help of arbitrage.

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This was possible as anyone could convert $XYZ of UST for $XYZ of LUNA and vice versa under any market circumstances. So, if UST’s price went above 1 dollar, people would buy LUNA (Let’s say $100) from the market, convert it into UST and sell UST (for more than $100) in the market, thus making a nice riskless profit. UST’s value is also brought back to a dollar as the supply of UST increases while LUNA’s supply drops. Unfortunately, this activity goes both ways, and here is why LUNA collapsed. There was a large amount of UST dumped in the market which made it lose its peg towards the downside. This triggered the arbitrage activity that is supposed to bring UST’s value back to a dollar. People started buying the cheap UST from the market, converted it into LUNA (which was worth more), and sold it in the open markets to realise the riskless profit. This led to an increase in the supply of LUNA at the cost of bringing back the peg. This did not happen as the huge dump of LUNA brought a lot of fear in the market regarding UST’s depeg. So as soon as the UST’s value reached closer to the dollar, people sold their UST at a