Recently, the most popular algorithmic stablecoin project LUNA has experienced a big crash, and its price has almost dropped to zero. Let’s take a look at the operation mechanism of luna:
Firstly, it will issue 1 UST when you locked 1 US dollar luna. If the value of UST in the market is higher than 1 US dollar, you can sell the issued UST to the market to obtain a profit. The more people minting UST, the more luna deflation will push up the price of luna.
Conversely, if the market value of UST is less than $1. You can buy 1 UST to redeem luna equivalent to $1. Similarly, you can profit from the value difference. The process of making UST will lead to deflation of luna, while the process of buring UST will lead to inflation of luna. The lower the price of UST, the more people will be attracted to arbitrage UST to issue more luna, leading to hyperinflation of luna. Finally both UST and luna is reset to zero.
The Luna incident shows that currencies issued out of thin air without intrinsic value support cannot escape the fate of returning to zero in the end. It is exactly the same as the collapse of Bitshares a few years ago, history is not a simple repetition, but there are striking similarities.
