With rising Bitcoin dominance on the market, Luna continued its fall, which practically meant entrance into a death spiral in which LFG had to sell more BTC and Luna would drop dragging UST with it. Analysts labeled the drops a 'death spiral' and questioned whether confidence would ever return to the Terra project. The additional selling pressure from LFG caused a crash in BTC, which in turn dragged the entire market with it, including LUNA. Luna Foundation Guard held billions worth of BTC that it immediately dumped on the bleeding market, creating a horror show for market makers and investors. īut the reality is not even close to what should have happened on paper. A death spiral occurs when, using USD as an example, the value of a stablecoin falls below 1 USD, representing lower demand while the supply continues to increase, driving prices lower. It's counter intuitive, but selling BTC to buy UST probably accelerated the de-peg due to the LUNA backing mechanism. LUNA crashes more due to market correlation The dramatic drop in TerraUSD and luna is a 'death spiral' that could see confidence in the stablecoin evaporate entirely, analysts at research house Fundstrat said in a note. All algorithmic stablecoins are at risk of falling into what is known as a death spiral. Woo saw the main flow in the backing mechanism in which Luna Foundation Guard is pledging to sell its BTC holdings in favor of UST, which should have increased the value of the stablecoin and not leveled any pressure on Luna. But the system is vulnerable to big price shocks of Tron.
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