Terra USD and LUNA: The whole fiasco explained

The price of the popular cryptocurrency Terra LUNA fell to almost zero on Thursday, from the highs of $119 it made in April. Right now, two coins -- Terra LUNA and Terra UST -- are the most talked about on the internet and social media platforms.

To understand the whole fiasco, we need to first understand the LUNA - UST exchange system.

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Terra UST should trade at $1. If it trades above $1, traders can buy $1 worth of LUNA and exchange them for one Terra UST, for an instant profit. If it trades below $1, people can buy one Terra UST for less than a dollar and exchange it for $1 worth of LUNA, for an instant profit.

This adds selling pressure on LUNA and ultimately leads to its price falling down.

So, when the price of UST fell below $1 dollar this week, arbitrageurs stepped in and created a death spiral for LUNA.

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The Terra money machine has collapsed almost entirely, LUNA, its sister token, has fallen almost 97% off its 2022 high. The near-complete failure of decentralized finance stands as an important lesson in the systemic risks of algorithmic stablecoins which have turned rather unstable.