# $LUNA, $UST

**Published by:** [Arya](https://paragraph.com/@aryaethn/)
**Published on:** 2022-05-12
**URL:** https://paragraph.com/@aryaethn/luna-ust

## Content

Here, we are going to talk about what actually happend to Terra $LUNA and $UST. Why it happened, and what the impact is to the cryptocurrencies.How does $UST work?Stablecoins are the main feature of the Terra protocol: crypto assets that track the price of an underlying currency. As a digital form of currency, Terra stablecoins can be used just like fiat currency with blockchain’s added benefits: an unchangeable public ledger, instant transactions, faster settlement times, and fewer fees. Stablecoins are only valuable to users if they maintain their price peg. The Terra protocol uses the basic market forces of supply and demand to maintain the price of Terra. When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price. The price stability of Terra is achieved by the protocol’s algorithmic market module, which incentivizes the minting or burning of Terra through arbitrage opportunities. Arbitrage occurs when a user profits from price differences between markets. The Terra protocol’s market module enables users to always trade 1 USD worth of Luna for 1 UST, and vice versa, incentivizing users to maintain the price of Terra. This same principle is true for all Terra stablecoin denominations. Users can access the mint and burn function of the market module by performing market swaps in Terra Station. To learn how to use the market swap feature of Terra Station, visit the Terra Station market swap guide.Example: If 1 UST is trading at 1.01 USD, users can use the market swap feature of Terra Station to trade 1 USD of Luna for 1 UST. The market burns 1 USD of Luna and mints 1 UST. Users can then sell their 1 UST for 1.01 USD, profiting .01 USD through arbitrage, adding to the UST pool. This arbitrage continues until UST price falls back to match the price of USD, maintaining Terra’s peg. If 1 UST is trading at .99 USD, users can buy 1 UST for .99 USD. Users then utilize Terra Station’s market swap function to trade 1 UST for 1 USD of Luna. The swap burns 1 UST and mints 1 USD of Luna. Users profit .01 UST from the swap. This arbitrage continues, and UST is burned to mint Luna until the price of UST rises back to 1 USD.What happened next?What happens if Terra doesn’t burn all the $LUNA?? After some time passed, Terra decided not to burn all the $LUNA and instead use it to sell in the market and buy some $BTC instead. What happens now? INFLATION in $LUNA. Demand is low but supply goes up, the price of $LUNA goes down. But now what happens to $UST when the price of $LUNA goes down? Because of the algorithmic model, the price of $UST goes down. The series of dominoes happens and both $UST and $LUNA go down together and no “$BTC back” can help the ecosystem.How $LUNA and $UST worked together.What happened in the past days?There has been two series of attacks to the protocol. First a big amount of $UST came in to get burnt. So the algorithm had to sell some big amount of $LUNA to give away the amount needed. $LUNA got minted, got sold in the market, the USD amount needed to cover the $UST burnt is now ready. This made the price of $LUNA and $UST just go down crazy. But one bad thing that the Terra foundation did is that they had not enough liquidity to cover all the $UST they have given away. Because they have minted a big amount of $UST with no backs. Now, comes in the second series of attacks. A huge amount of $UST needed to get burnt. Not wnough liquidity to back it up. What happens?The crash!After all that happened a big crash came to $LUNA and $UST price. This crash made everyone to fear about the future of the price and the project and made them to sell their $LUNA and $UST against any other cryptocurrency they could. What happens now? The GREAT Crash! you guessed right. So that is why $LUNA and its “Stablecoin”, $UST, faced a major crash in price.Will it come back?The algorithm is designed so that the price of $UST gets pegged to 1 USD as soon as possible. when this happens and the demand gets back to $LUNA, I can anticipate that $LUNA and $UST can come back. But probably not where they have been. It is too much out of mind that we can see 3 digit $LUNA, but a 2 digit $LUNA can happen. If you learnt something from this little article, I would be glad if you shar it with your friends. Thank you.

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