- During the last 24 hours, UST touched the low of $0.6879 and the community questioned the mechanism that keeps it pegged 1:1 to the dollar even though the de-peg was brief, panic spread in the market.
- As UST’s price has fallen, so has its market cap along with LUNA’s.
- It all started on Saturday, May 7, when a massive increase in UST supply began to be seen.
The last few weeks have been particularly difficult for the entire crypto community, but beyond that, investors have panicked as the stablecoin TerraUSTthe third-largest by market capitalization, unpegged from the US dollar.
During the last 24 hours, UST touched the low of $0.6879, according to CoinMarketCapand with it, the community begins to question the mechanism that kept, in theory, the price of the stablecoin pegged to the US dollar.
In theory, according to Do Kwon, founder of Terrraform Labs, TerraUSD (UST) is a stablecoin that had the ability to maintain 1:1 parity with the US dollar using algorithms. Unlike Tether, UST would not require holding a reserve of fiat currencies to hold value, aside from the algorithmsUST relies on another token called LUNA to stabilize prices.
In a simplified way, the Terra protocol is in charge of destroying and creating supply of UST and LUNA to adjust the supply and thereby maintain price stability.
AND, As UST’s price has fallen, so has its market cap along with LUNA’s. In fact, in the last 24 hours, LUNA has decreased by 39.71%.
the beginning of the end
The question is: What went wrong? It all started on Saturday, May 7, when a massive increase in UST supply began to be seen. In particular, users on Twitter began reporting suspicious withdrawals from Curve, one of the largest liquidity pools for the stablecoin.
Basically, a single wallet added $84 million in UST liquidity on Ethereum and $108 million on Binance. Here the community began to wonder if the Foundation was behind the move. Do Kwon assured that they were not adding liquidity to the market.
With this, on Twitter began to speculate about a deliberate manipulation of the market. In fact, it was considered as a coordinated attack for both UST and LUNA. That is how UST started trading below US$99 cents.
Through his Twitter account, Do Kwon assured that Terraform Labs has no incentive to disassociate UST, but, at the same time, LUNA experienced a significant loss over the weekend, and, Although the decoupling was brief, panic spread in the market and with it renewed calls for a “Ponzi scheme”.
Eventually, the situation in the market led to UST crashing to as low as $0.62 on some crypto platforms.
At the time of writing, UST is priced at $0.92 with a market capitalization of $16.306 million US dollars. While LUNA is priced at $29.58 with a market capitalization of $10.954 million US dollars.
If the market capitalization of LUNA is lower than that of UST, there is a risk that there will not be enough funds in Terra to support the value of the stablecoin.
The FUD spreads
Since its low, UST has managed to get closer to parity with the US dollar. The Luna Foundation Guard (LFG) probably had something to do with it, and since the weekend, they’ve been on damage control to bring parity back.
In fact, the LFG reported on May 8 that they were trying to proactively defend the stability of the peg. To that end, on May 9, Do Kwon explained that LFG voted to lend $750 million in BTC and another $750 million in UST.
Despite claiming that it was a BTC loan, the crypto community thought that perhaps the foundation was selling its Bitcoin holdings.
In fact, as of May 9 at 6:34 pm UTC, the wallet address associated with the LFG would have emptied its holdings in Bitcoin. Previously, it had 42,530 BTC and it was empty.
And, as if this wasn’t enough, Binance, the largest crypto exchange by market volume, suspended on May 9, withdrawals from both UST and LUNA due to “high volume of pending withdrawal transactions”. By May 10, the withdrawals of both cryptos were restored, but they assured that they will continue to monitor the market.
What will happen now?
Regardless of this, what has happened with UST over the last few days has raised doubts in the crypto community about the ability of stablecoins like UST to maintain parity.
Stablecoins are not supposed to wobble at all. But, in addition, the “decentralized” nature of these tokens has been questioned considering the degree of action that the Foundation has executed to maintain the stability of UST.
In fact, Janet Yellen, Secretary of the Treasury, assured in a hearing on Tuesday that the situation with UST has shown that stablecoins must be regulated by this year.
“A stablecoin known as TerraUSD experienced a run and decreased in value. I think this just illustrates that this is a fast growing product and there are risks…”, assured the Secretary of the Treasury.
Although UST has recovered somewhat, LUNA appears to continue in free fall. The question is: What will happen now?
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