How UST crashed to $0.62 and caused marketwide chaos

Posted: 11 May 2022 6:20 pm
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TerraUSD (UST) dipped as low as US$0.62 on Coinbase before regaining some of its value, with the stablecoin currently trading at US$0.82.

  • Terra's non-profit wing recently acquired US$3.5 billion worth of Bitcoin (BTC) to support the UST dollar peg.
  • Luna's ongoing depreciation has led to a series of marketwide sell-offs, causing the total valuation of the digital asset sector to dip to US$1.5 trillion.
  • Over the past week, Luna's value has dropped by 81%, resulting in Binance temporarily halting UST and Luna withdrawals.

The cryptocurrency market seems to be in a bit of a spin after TerraUSD, a USD-backed stablecoin, slipped from its intended US$1 peg to an all-time low of around US$0.62 cents yesterday.

Devised by Singaporean firm Terraform Labs a few years ago, UST is classified as an "algorithmic stablecoin". It's a digital asset that tries to maintain its value via a combination of instructions encoded in software programs and active treasury management.

To elaborate, unlike other popular USD-pegged tokens such as USD Coin (USDC) and Tether (USDT) that are ostensibly backed by cash and other assets of a similar nature, UST maintains its parity with the dollar thanks to its relationship with Terra's native asset, LUNA. As a result, the value of LUNA and UST are inextricably linked.

How to buy TerraUSD

A closer look at why Luna is in freefall right now

UST is pegged against the US dollar, with Terra securing collateral using its LUNA tokens. Whenever the value of UST pushes past the $1 mark, investors are provided with hefty incentives to burn LUNA and in turn mint more UST. The same is also true when UST dips below its intended $1 peg, allowing the ecosystem to remain fairly stable even when the market is going through a rough patch.

A massive volume of UST is currently held within a select few decentralised finance (DeFi) protocols such as Anchor, a lending platform that promises extremely lucrative rewards of up to 20% annual percentage yield (APY) for UST depositors. This means that whenever mass liquidations take place – as was the case recently – panic withdrawals from Anchor follow. This results in UST's value dipping suddenly as users are willing to pay below peg to ensure they can access their capital.

To this point, data available online shows that on 6 May — right before the crash — the total amount of UST on the Anchor protocol nosedived from 14.09 billion UST to 10.95 billion UST, showcasing a dip of more than 22%. This placed downward pressure on the price of UST, which helps explain the initial depegging that was further agitated by users on exchanges willing to sell the former stablecoin at prices below $1.

Over the last 48 hours, the amount of UST on Anchor slipped from 10.3 billion to just 6.4 billion tokens. Because the reserve assets that back the value of UST are composed of market-leading coins such as BTC, Avalanche (AVAX) and LUNA, any withdrawals also negatively impact the price of the coins in the treasury. Given that BTC tends to lead the market, any drop in Bitcoin's price tends to take the market with it, which helps explain the events of yesterday's crash.

What lies ahead for Terra Luna?

Recently, Terra's co-founder Do Kwon via the Luna Foundation Guard decided to purchase $1.5 billion worth of Bitcoin to help bolster UST in times of crises. However, the way things are panning out at the moment, investor confidence in Luna has become shaky.

Moving forward, it will be interesting to see if Luna is able to win back the trust of the crypto community. At press time, UST is still trading well below its $1 peg at $0.829 while Luna is selling for $13.2, down more than 80% over the past week.

Interested in cryptocurrency? Learn more about the basics with our beginner's guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.


Disclosure: The author owns a range of cryptocurrencies at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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