Multi-billion dollar Terra’s stablecoin UST is on a ‘death spiral’. 3 experts discuss whether it can be re-pegged and what this might mean for Blockchain’s native LUNA token, Bitcoin and the crypto ecosystem.
Terra’s stablecoin UST and token LUNA collapsed
As you can follow on Kriptokoin.com, the recent crypto market price action has caused investors to see blood on the streets wherever they look. But the dramatic unraveling of Terra’s UST algorithmic stablecoin this week took many veteran crypto watchers breathless.
After falling below the stablecoin over the weekend amid crypto market volatility, the UST stablecoin fell 68% to $0.34 on Wednesday. Today, after recovering a bit, it lost value again and was trading at $0.03882 at press time.
Terra’s native LUNA token lost 99.9% of its value. According to CoinGecko pricing, it is at $0.0085.
The sudden drop came as Bitcoin plunged below the psychologically important $30,000 level, fueling fears of market contagion. On Tuesday, Terraform Labs CEO and co-founder Do Kwon said on Twitter that he was close to announcing a recovery plan for UST.
According to The Block, Luna Foundation Guard is reaching out to crypto investors in hopes of raising $1 billion to bring the UST stablecoin back to peg. The nonprofit has deployed $1.5 billion in capital to ‘appease market concerns around the UST’ and maintain the fixed point. The deal was still being negotiated as of Wednesday morning, but Kwon revealed a plan in a thread of tweets in hopes of regaining the peg.
The Terra ecosystem caught the attention of investors because both the governance token LUNA and the stablecoin UST has increased in market capitalization over the past year. Terra-based Anchor Protocol has also been closely watched, as it offers around 20% fixed interest rates to UST depositors on its platform.
Terra ecosystem is supported by billionaire Mike Novogratz’s crypto venture capital investors including Galaxy Digital, Lightspeed Ventures, Pantera Capital and Polychain Capital. Marcus Sotiriou, analyst at GlobalBlock, points out in a research note Wednesday:
The impact of this event on the wider market is significant. The UK-based digital asset broker will soon find out which DeFi projects treasures are on the anchor or UST, so it will result in the implementation of important protocols.
Can Terra regain UST’s dollar peg?
As investors rush to sell UST holdings, the question remains whether the UST can bounce back from such a dramatic breakup and lose its fixation. Patrick Heusser, a senior trader who is currently the CEO of Crypto Finance (Brokerage) AG, believes that algorithmic stablecoins always have the risk of sudden de-pegging tails. The Trader comments:
It is very difficult for a stablecoin to regain full trust and trade on par once pegged. Tether (USDT) is one of the few that is making a comeback, but keep in mind that USDT is fully collateralized (so called), not algorithmic.
Joseph Edwards, head of financial strategy at Solrise Group, has long been sounding the alarm for UST. He said the rise and fall of Ampleforth (AMPL) in March and the dramatic collapse of Titan are clear examples of why algorithmic stablecoins don’t work. However, the self-proven bear UST does not foresee the UST stablecoin going to zero. The Strategist says:
In just six months I think it will either no longer exist or it will shrink drastically. Will it repeat exactly? It’s hard to say; I could see that owners were forced to hair-cut at some point, and if I still had UST today, I’d probably be happy to cut my losses and come out at $0.95 or $0.98. If
UST manages to stabilize, purchasing the heavily discounted LUNA token will yield significant returns. This is because the stablecoin is programmed to maintain its $1 value through an arbitrage mechanism where $1 of LUNA tokens must be burned to mint $1 of UST. Sean Farrell, head of digital assets strategy at Fundstrat Global Advisors, predicts
However, key issues with UST will remain and it will face its algorithmic stablecoin fate, embed the UST in applications that facilitate large, sustained demand, and/or Or it will only be a matter of time before it introduces a collateral-based feature. The best-case scenario for most crypto investors would likely be a ‘slow bloodshed’ into a market that has acknowledged the demise of UST.
Not everyone is ready to give up on IHR. Emin Gün Sirer, founder and CEO of Ava Labs, explained in a Tuesday tweet thread that the UST is on a bullish trend given the strong team behind the flexible main-chain and stablecoin. In April, Terra backers received $200 million worth of Avalanche (AVAX), developed by Ava Labs. Emin Gün Sirer explains his views as follows:
I am not in the least surprised at the durability of the UST. Keep in mind that each stablecoin is decoupled from time to time, including fully collateralized, fiat-backed stablecoins. Everyone with a real team behind them is back. Bounce back is a great arbitrage opportunity. The dynamic that leads to a bank run reverses on the way back.
What does this crash mean for LUNA and BTC?
As UST is the main stablecoin for the Terra ecosystem, its apparent instability could pose a major threat to the entire Terra ecosystem and its native token LUNA. Patrick Heusser of Crypto Finance Brokerage says:
If you’re a builder or project on the Terra Luna system, but you’re not sure if the stable payment token is ‘really’ stable, it makes it harder to find users or clients to use your platform. So you better go and build on Solana or Ethereum with a fully backed stablecoin like USDC.
‘death spiral’ in UST and LUNA, crypto as the Luna Foundation Guard, the non-profit behind the Terra ecosystem, actively sells its Bitcoin reserves to raise funds and save the peg may pose a potential systemic risk to the market. Patrick Heusser comments:
Imagine that UST reaches $50 billion or $100 billion in market cap and LFG (in terms of Bitcoin assets) will be 10 times larger. Then it really becomes a big risk to the Bitcoin price if the stablecoin peg breaks.
Fundstrat’s Sean Farrell does not see the Luna Foundation Guard’s peg defensive move as a serious concern for Bitcoin and Ethereum prices. However, he comments, “The risk from LUNA could increase the negative effects of the current macro environment on major cryptocurrencies, causing BTC and ETH to lose support.” However, regardless of whether the UST will recover or not, he is not optimistic about the future of long LUNA trading due to the ‘current unfavorable macro environment for altcoins’.
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