Traders of Terra's LUNA token suffered some of their biggest weekly losses in recent months as prices fell 99.7% in a week, data shows.
The LUNA price fell 96% in the last 24 hours alone, pushing it to less than 10 cents. That's down from about $60 earlier this week and a record $120 in mid-April.
A change in market dynamics caused LUNA prices to plunge at a breakneck pace. LUNA crashed through several support levels as terraUSD (UST), a stablecoin issued by Terra to be priced 1:1 to the U.S. dollar, lost its peg.
Selling pressure on LUNA began over the weekend as investors liquidated their returns from Anchor, a Terra protocol for generating returns on UST, pushing rates lower, analysis shows.
That's because of how algorithmic stablecoins like UST work. 1 UST can be redeemed or minted for LUNA worth exactly $1 at any time. In theory, this helps UST retain its value and creates demand for both tokens.
Traders can continuously buy and sell LUNA and UST to maintain the peg, thereby profiting, which incentivizes them to maintain UST's peg.
The drop in UST price this week - it fell to 22 cents yesterday - led to additional LUNA being minted and issued on the open market. According to Messari, circulating LUNA supply more than tripled to 1.4 billion tokens on Thursday, up from 377 million two days ago.
The sharp increase in supply increased selling pressure on LUNA tokens, as evidenced by the price drop. At the same time, it put UST on a recovery path, and tokens rallied to the 60-cent mark in the European morning hours on Thursday.
In addition, Terra proposed several measures on Thursday that would save UST's bond and prevent severe dilution of LUNA.
LUNA's plunge this week has taken it out of the top 10 cryptocurrencies by market cap to rank 81st this morning. The token was valued at nearly $4 billion last week, while its capitalization plummeted to $720 million on Thursday.
Still, some market watchers remain sanguine about the longer-term prospects of algorithmic stablecoins.
"It's still the earliest days of algorithmic stablecoins," Brian Gallagher, co-founder of Partisia Blockchain, said in a Telegram message. "There will be many failures along the way to hold the peg as they are largely in the experimental phase. We need to accept the failures along the way."
However, potential contagion risks caused Tether (USDT), the largest stablecoin by market cap, to lose its peg to the U.S. dollar in the European morning hours today.