TerraUSD (UST) lost its value indexed to the US dollar and fell below $0.30 in a few days.
Stablecoin started losing par with the US dollar over the weekend. Efforts to maintain the value of the UST were futile and the asset’s value fluctuated greatly.
At the time of writing, UST is at $0.69 according to Binance data. This decline in UST also caused the value of LUNA to plummet, which should have helped keep the asset’s value stable. LUNA is currently trading at $1.10 versus last week’s level of $84
The UST situation has emerged extremely complex and fast. In this article, we will summarize how we got to this point.
How Does UST Work?
Stablecoins are cryptocurrencies whose value is expected to maintain a certain parity.
Tether’s USDT and Circle’s USDC are stablecoins backed by traditional fiat currencies. There are also crypto-backed stablecoins like Maker Dai.
Terraform Labs’ UST, on the other hand, is in a category called “algorithmic”. These cryptos are designed to use market incentives to protect pegs rather than relying on collateral.
Terra was launched in 2018 with support from Binance Labs, OKEx, Huobi Capital, and Dunamu. The UST, on the other hand, was launched in 2020 and the asset exploded during the 2021 bull rally.
Terraform Labs CEO Do Kwon explained how UST should work.
“Any person can burn one dollar worth of Luna to print TerraUSD, and vice versa, one TerraUSD can always be used for one dollar worth of Luna. As long as LUNA has a market cap, you can always try arbitrage against the system to print and use stablecoins”
The Luna Foundation Guard raised a billion dollars in February to create a Bitcoin reserve for UST. Do Kwon stated that LFG has increased the amount for Bitcoin reserves to $ 2.2 billion and has a long-term target of $ 10 billion. LFG added $231 million in Bitcoin to its $100 million AVAX reserve in May.
LFG said on May 5 that it purchased $1.5 billion worth of Bitcoin, bringing its total reserves to $3.5 billion.
Crash
Following these developments, there was an eventful event this past weekend that resulted in large volumes of UST sales. As crypto researcher Mika Honakasalo explained, on-chain data showed that a large number of USTs were sold compared to other stablecoins. The exact reason for this is still unclear.
The selling pressure caused the UST to lose its dollar parity. However, this is not the first time. In May 2021, the UST value fell as low as $0.96 before recovering.
However, on Monday, LFG’s value dropped to $0.61. The same day, LFG said that it will preserve the value of the asset by lending $1.5 billion in Bitcoin to market makers so they can support market activity and help maintain parity with the dollar.
Binance suspends LUNA and UST withdrawals shortly thereafter. Later that day, the asset retraced its losses and climbed above $0.90.
LFG announced that it is seeking another $1 billion from major cryptocurrency investors. After this news, the price started to decline rapidly again and reached $0.30.
Today, one of the four major exchanges in South Korea suspended LUNA trading.
Terra’s DeFi platform Anchor Protocol’s native token Anchor has also dropped more than 70% in the last day.
Do Kwon said today that they will bring back the UST pair. He said that for this, they will increase the LUNA edition by 400%.
However, the collapse left behind a great deal of insecurity and uncertainty.
It remains unclear whether LUNA and UST will regain their former positions.
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