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Inflation, Terra Keep Crypto World Terrified

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A less than expected fall in the U.S. CPI and the developments in the Terra ecosystem rattled crypto world as market capitalization dropped more than 7 percent overnight to $1.37 trillion, from $1.46 trillion early on Tuesday.

Consumer Price Inflation in the U.S dropped to 8.3 percent in April, versus the 41-year high of 8.5 percent in the month of March. Markets were expecting the reading to have fallen to 8.1 percent.

Terra network's stablecoin Terra USD's (UST) price dropped to an all-time low of $0.2998, losing more than 70 percent of its peg to the U.S. Dollar. Terra network's governance token Terra (LUNA) plunged to a low of $0.8384 in the past 24 hours.

Between May 8 and now, LUNA's market capitalization has plunged 90 percent, from $22 billion to $2.2 billion, while that of the stablecoin UST dropped 60 percent, from $18.6 billion to $7.5 billion.

LUNA is currently trading at $3.26, down 90 percent on an overnight basis and 96 percent on a weekly basis. It has slipped to rank 35 overall, from rank 9 on May 8.

UST is currently trading at $0.474, down 49 percent on an overnight basis and 53 percent on a weekly basis. It has slipped to rank 16 overall, from rank 10 on May 8.

The UST stablecoins fiasco had its reverberations in the Congress as well. In a hearing before the Congress on Tuesday, Treasury Secretary Janet Yellen said: "A stablecoin known as TerraUSD experienced a run and declined in value. I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks."

Earlier on Monday, the Federal Reserve Board had in its Financial Stability Report warned of the risk of stablecoins.

Do Kwon, CEO of Terraform Labs, the organization behind the Terra network has in the meanwhile tweeted a plan to rescue the stablecoin's peg, including absorbing the stablecoin supply that wants to exit before $UST can start to repeg.

Though the not-for-profit Luna Foundation Guard had reportedly built a decentralized UST reserve of close to 80,000 Bitcoins to support the UST in maintaining its peg, the same could not stave off the market rout, as the infrastructure to utilize the reserves was not formally launched. According to a report by Coindesk, a plan to connect the reserve to the blockchain with a smart contract to stabilize UST in a crisis was weeks away from deployment.

Bitcoin is currently trading at $31,013.34, down 2.55 percent on an overnight basis and down 20 percent on a weekly basis. BTC had touched a 24-hour low of $29,323.23. Bitcoin dominance has surged to 43.2 percent.

Ether is trading at $2313.58 after having shed 4.3 percent in the past 24 hours and 18.6 percent in the past seven days. ETH touched a low of $2,170.84 in the past 24 hours. Ether's dominance too increased to 20.5 percent.

Stablecoin dominance increased to 12.6 percent in tandem with the risk-off behaviour in the broader crypto market.

Residual altcoins now command only 23.7 percent of the overall crypto market.

44th ranked Maker (MKR), the governance token of MakerDAO, a decentralized autonomous organization that also manages the DAI stablecoin, is trading more than 23 percent higher overnight. Amidst the meltdown in TerraUSD (UST), Maker's algorithmic stablecoin Dai (DAI) has risen to become the fourth most valuable stablecoin.

Among the top 20 cryptos, BNB (BNB), Cardano (ADA), Wrapped Bitcoin (WBTC), TRON (TRX), Litecoin (LTC) and Cronos (CRO) are trading with losses of less than 10 percent.

XRP(XRP), Dogecoin (DOGE), Polkadot (DOT) and Polygon (MATIC) are trading with losses between 10 and 20 percent.

Solana (SOL), Avalanche (AVAX) and Shiba Inu (SHIB), have declined more than 20 percent.

The Mission and Vision statement of Luna Foundation Guard, mentions that unlike other stablecoins that are backed by fixed deposits of the pegged fiat currency or over-collateralized in another DeFi asset, the value of Terra's family of stablecoins is maintained through a system of arbitrage incentives, open market operations, and dynamic protocol levers that maintain robust peg stability and scalability of its supply. It also claims that LUNA, its governance token delivers counter-cyclical monetary policy levers to maintain the peg during periods of both contractionary and expansionary demand cycles of its stablecoins.

The UST/LUNA fiasco has triggered a debate on the efficacy of algorithmic stablecoins and whether an algorithmic stablecoin arrangement can be sustained without the support of a strong set of market players who would be incentivised to buy/sell and trigger the mint/burn mechanism to restore the peg. It has also reignited the debate on the comparative safety of algorithmic and non-algorithmic stablecoins.

Would the UST's Dollar peg be restored and if so, how fast, is what the markets are keenly watching. Also of interest would be the stance that regulators would adopt, in the backdrop of a market impact of this magnitude.

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