Terra’s algorithmic stablecoin TerraUST, known more simply as the UST, lost its peg for the second time since Sunday.
In the course of the past 24 hours, the stablecoin with an 18.1 billion circulating supply dropped in value by more than 27% to an all-time low of $0.6879. The UST has since regained the majority of its value is hovering at around $0.9161 at the time of writing.
The freefall of the UST occurred amidst a sell-off in the broader crypto market as Bitcoin plunged below $30K, while whole cryptocurrency market’s value as a whole dropped by 2.6% to $1.46 trillion.
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This marks the second instance of Terra’s algorithmic stablecoin losing stability in the past three days. On Sunday, May 8th, UST briefly dropped for the first time when a single whale dumped $285M worth of TerraUST, causing its price to dip to $0.987, though it swiftly bounced back.
To keep its stablecoin’s 1:1 peg with the U.S. dollar, Luna Foundation Guard (LFG) yesterday announced the lending of $1.5 billion worth of Bitcoin. The foundation expects to make Bitcoin the reserve currency for Terra’s ecosystem, and also its main stablecoin UST.
1/ The LFG Council just voted to deploy 1.5B in capital (0.75B in BTC, 0.75B in UST) to allay market concerns around UST. Some more context on why and how: https://t.co/TfaAPkzgUJ
— Do Kwon 🌕 (@stablekwon) May 9, 2022
Contrary to centralized stablecoins like Tether (USDT), TerraUSD is a decentralized algorithmic stablecoin, which maintains its peg to the U.S. dollar through the use of the Terra ecosystem’s governance token, LUNA.
This is made possible through the smart contract-based mechanism by which each new TerraUST stablecoin is minted through the burning of LUNA coins.
The price of the UST depends on the algorithm that tracks demand for the stablecoin and adjusts its supply accordingly. The protocol feature, called the arbitrage mechanism, incentivizes users to burn LUNA tokens and mint new stablecoins when the price of UST is too high.
On the other hand, the algorithm also facilitates the opposite action—the burning of UST stablecoins to mint LUNA when the price of the stablecoin drops. In this way, the protocol feature is helps stabilize UST prices.
LUNA’s Price Drops
Since both TerraUST and LUNA are interconnected, the price drop for one reflects in the other.
According to CoinMarketCap, Terra’s governance token LUNA fell in value by 60% over the past 24 hours, going from $61.24 on Monday 9th, to $24.14 early on Tuesday 10th. LUNA’s market capitalization shrank to reflect this, dropping by 48% and sitting at $10,8 billion at the time of writing.
Why You Should Care
TerraUST has over 18 billion coins in circulation and is the tenth-largest crypto by market value. If the LFG implements succeeds in its plans to make Bitcoin a reserve asset for the Terra ecosystem, thereby allowing UST holders to redeem stablecoins for bitcoin, the repetition of such situations could have a hefty negatively impact on the entire Bitcoin market.
