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What happens to Terra: its stablecoin fell by 50% and LUNA collapsed by 95% ?

CEO Do Kwon posted a statement on his Twitter account.

Terra is going through a strong crisis in recent days, both in its native currency and in its stablecoin. After a month of millionaire investments in bitcoin (BTC) to create a balance of 10 billion dollars that allows it to support its Terra US ( UST ), the stablecoin decoupled from the value of the dollar and fell 50%, which forced the Luna Foundation Guard (LFG) – the Terra Labs organization in charge of maintaining its balance – to take desperate measures.

LFG had to send all its BTC (it already had more than 80,300 cryptocurrencies and was the second largest institutional investor in the market) to a commercial company in charge of selling it to try to defend the USD 1 parity. Do Kwon, CEO of Terra Labs, took charge of the situation and tried to calm investors on his Twitter account from him.

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“I understand that the last 72 hours have been extremely difficult for all of you. Know that I am determined to work with each of you to overcome this crisis, and we will build our way out”, said the businessman to open a thread of fifteen tweets, in which he tried to explain what the recovery process would be like.

“First of all, the only way forward is going to be to absorb the stablecoin supply that wants to get out before UST can start to rally. There is no way around it,” Kwon added, proposing “several corrective measures” to help the pegging mechanism absorb supply.

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The company’s intention now is to increase the UST parity and consumption rate pressure so that the UST oversupply decreases “and spreads start to heal.” For that, he has decided to get rid of the assets he bought to create a new balance sheet and erase the efforts of the last few months.

According to Grayscale, these efforts to restore the peg by selling BTC expose a point of weakness in stablecoins that are not strongly collateralized. “If the price of the collateral backing the supply of stablecoins suddenly plummets, the peg becomes increasingly difficult to defend as it is forced to sell declining assets,” the firm noted in a statement.

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In addition to the decline of UST, Terra’s native token, LUNA, is also going through a historic crisis. Due to the collapse of the stablecoin, the cryptocurrency suffered this loss of confidence and plummeted by 95% in a few hours, going from being the eighth largest cryptocurrency in the market by capitalization, to position 73.

“Terra’s focus has always been on a long-term time horizon, and another setback this May, similar to last year, will not discourage #LUNAtics. Short – term setbacks do not define what you can achieve. It is how you respond that matters”, added its founder Kwon on Twitter as a closing of his brief statement.

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