The Fall of Korea-Made Cryptos Moves the Global Stage
The global cryptocurrency market has been rocked by plummeting prices for South Korean cryptocurrency terraUSD, also known as UST, and its sister luna, raising fears that this could lead to the crypto market’s version of the Lehman Brothers collapse.
According to crypto market analysis website CoinMarketCap, terraUSD and luna prices registered 857 won ($0.66) and 443 won as of 2 p.m. on May 12, down 14% and 96% from 24 hours ago, respectively.
Terraform Labs, created by Korean engineer-turned-CEO Do Kwon, developed both cryptocurrencies and is responsible for issuing them. Luna’s price once reached over 150,000 won last month to crack the list of top 10 cryptocurrencies with the highest market capitalization in the world.
A so-called “stablecoin”, UST is intended to maintain parity with the US dollar. It uses a complex combination of codes, commercial incentives and smart contracts to control supply and stabilize prices.
If the price of UST falls below $1, investors can deposit UST at Terraform Labs and receive $1 of luna to earn up to 20% profit in return. In this case, the distribution volume of the UST is reduced to allow the price to rise back to $1.
The algorithmic mechanism of both cryptocurrencies has hit a wall as sentiment in the global crypto market has recently worsened with struggling bitcoin prices. The weakening of the market led to a sell-off and the price of UST eventually slipped below $1, driving the price of luna lower.
Quoting analysts from research firm Fundstrat, Markets Insider said the dramatic fall in terraUSD and luna is a “death spiral” that could see confidence in the stablecoin completely evaporate.
Bloomberg noted that comparisons to the 2008 financial crisis have begun to creep in.
“Characteristics of shadow banking, such as circular market mechanics and extremely high leverage, are readily visible in the Terra ecosystem, which academics fear is creating a digital second wave of defaulting lenders and savings wiped out,” he said.
South Korean crypto exchanges, including Upbit and Bithumb, have issued a warning for investors to exercise caution when trading Terraform Labs cryptocurrencies.
THE KOREA HERALD/ASIA INFORMATION NETWORK