News / Terra (LUNA): Why This Booming Token Erased 30% of its Value

Terra (LUNA): Why This Booming Token Erased 30% of its Value


Terra (LUNA) looked like one of the most resilient tokens in DeFi and gamified finance, with expectations of rallying above $100 in 2022. But over the past week, LUNA is down more than 27% and traded at $46.07 with further losses early on Monday. The LUNA price weakness went above the overall market slide in the past few days.

In this rapid price drop, not even the high staking rate of LUNA managed to protect the token, which is used to generate UST dollar-pegged coins. LUNA sank despite reports of newly launched games on the network. 

Terra Project Tied with QuadrigaCX Exchange

The chief reason for the crash is that one of the subsidiary projects of Quadriga, Wonderland, was found to be ran by a former co-founder of the QuadrigaCS exchange. This market operator became notorious for evaporating hundreds of thousands of BTC after the death of co-founder Gerald Cotten.

What is the Wonderland Project

Wonderland is a DeFi project boasting of more than $685m in value locked. The DeFi returns are exorbitant, more than 82,500% annualized, raising some red flags as to the project’s viability in the long term. 

The Wonderland scandal was sparked when an anonymous user unearthed the real name of one of the project’s co-founders. It turns out Michael Patryn, former QuadrigaCX partner, was also treasury operator for the now-defunct decentralized exchange. 

The on-chain investigation caused immediate action within the Wonderland project, rallying the community to vote on the way forward. A vote to reorganize the leadership of the project happened over the weekend. 

Most Wonderland owners of the TIME token are in favor of removing Patryn, who backed the project under the pseudonym of Sifu on social media. The project has a tight-knit community that is now deciding on a new leadership and a way forward for Wonderland. 

The chief concern is how to bring back the value of the TIME token, which was affected severely by the scandal. The TIME token has traded above $9,700 in the past year, only to unravel and finally crash to a level of around $300. The very volatile price and the high per-unit price raise some questions on the viability of TIME and its real potential to preserve high prices.

Some of the ideas were to redistribute the project treasury to as many owners as possible. One of the concerns for the Wonderland project was the significant effect of large-scale owners, or whales, on how the situation should proceed. 

Whatever Wonderland decides, the scandal underlines the risk of seemingly decentralized organizations promising outsized returns. TIME is a rather risky token using the Gate.IO exchange, with a low market capitalization ranking it beyond the first 2,000 most expensive crypto startups. Despite this, TIME has managed to build a community with expectations of significant returns for locking tokens. 

Can LUNA Recover

The chief concern was that the Wonderland scandal would affect LUNA and indirectly, its dollar-pegged asset UST. The Wonderland protocol also had its own dollar-tied asset, Magic Internet Money (MIM). Both tokens managed to keep close to their $1 ratio.

LUNA, on the other hand, was considered a suitable buy at the moment, due to the suddenly low price which does not reflect the protocol’s fundamentals. 

It is possible LUNA will recover as the project is only the carrying blockchain for Wonderland. Before the crash of the TIME token, the Wonderland protocol had independently locked in nearly $400M in value, according to data on DeFi Llama. 

The value of UST is also constant and close to $1,while the token has expanded its supply by 1B in the past four weeks. 

The deeper cut into LUNA may make the asset more attractive in the coming days. LUNA backtracked even more than Bitcoin (BTC), which now established some stability around $37,000. Despite the ongoing voting and doubts about Wonderland, there are signs of new LUNA buying. 

One of the risks for LUNA and UST is the Anchor protocol, a DeFi hub depending on UST deposits. The protocol aims to add new types of collateral to ensure it is well backed by crypto assets and can afford to pay out its promised returns. 

The challenge of balancing the Anchor protocol is not new, and the project may succeed in keeping up its collateral and earnings promised. In total, the Terra protocol holds $13.24B in notional value, with peak value above $20B. Anchor Protocol is responsible for more than 53% of all assets within the Terra ecosystem. 

Terra is thus vulnerable in ways similar to Ethereum when Maker DAO was the dominant protocol. For now, LUNA seems capable of absorbing some of the weak points of Anchor protocol.

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