TLDR: Luna is the native token of Terra, a blockchain developed by the Korean firm Terraform Labs. Despite being considerd a stablecoin, Luna fell from more than $117 in April 2022 to less than one-hundredth of a cent. The crash led in many ways to a massive decline in crypto markets overall.

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That brings us to Luna, the stablecoin that, well, wasn’t. 

Why Stablecoins are Such a Crypto Staple

A stablecoin is a crypto token that’s designed to be at a fixed rate forever. There are quite a few stablecoins out there, including Tether (USDT) and US Dollar Coin (USDC). USDT and USDC are designed to be 1 for 1 to the dollar. 1 USDT is always $1, and 1 USDC is always $1. It requires the group behind the token to have enough reserve to cover the coin. 

Circle, the group behind USDC, handles 1:1 liquidity by having full reserves to cover the stablecoin. 

The Story of Luna

Luna is the token launched by Terraform Labs in July of 2019. It is now known as Terra Luna Classic (LUNC), but it had one heck of a rise: at one point, the coin formerly known as Luna was “to the moon,” riding high at $80 a piece!

Unlike USDC, which relies on large reserves, Luna was designed to get its stability through a network of investors trading constantly. This idea of algorithmic stablecoins working together on the Cosmos blockchain worked for a while: people would have to mint Luna in order to buy the stablecoin of their choice (usually Terra Classic USD - UST). So buying UST meant making Luna, but the other direction meant converting UST to Luna, raising the price of UST because there were fewer coins. 

Lost? Understandable. Simply put, this give and take was designed to keep a steady flow of both UST and Luna working together in harmony. 

Luna’s Great Crash

To this day, no one knows exactly why Luna crashed on May 11th, 2022, when it was supposed to always be in harmony due to how UST and Luna are minted/burned to keep it synced properly as a stablecoin. Unfortunately, UST lost its peg, meaning that it was no longer able to be 1 UST for 1 Luna, creating perfect crash conditions. 

And crash it did, tumbling down from its all-time high of $100 down to $0.00000112 in May 2022. 

What Can We Learn From Luna’s Rise and Fall?

the rise and fall of Luna Classic, as it’s now known, teaches us that even a passively-held portfolio should be watched carefully. 

Big selloffs create market panic, just like they do in the traditional finance world. Should you put all of your eggs in one crypto coineven if the potential for big profit is there? Nope. A balanced portfolio is best, whether we’re talking regular stocks or crypto assets. 

Serise Lange is a contributor to Nav.it, the money management app helping all users build a future of wealth.