Key facts:
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UST sell-offs exceeded the ability of the algorithmic protocol to recover.
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On at least two other occasions, the price of UST fell below $0.95.
The Terra network cryptocurrencies are not going through their best moment. Yesterday, May 9, both terra (LUNA) and terra USD (UST) had a significant drop in their prices that is still maintained. This is somewhat worrying for this last coin, which, being a stablecoin, should always be kept at USD 1.
At the time of writing this article, each UST is trading at USD 0.81. Hours ago, as CriptoNoticias reported, reached up to USD 0.68. Next, we will try to explain how the events occurred.
Since May 8, there has been a small decoupling in the price of UST with respect to the US currency. That’s something that, from time to time, happens in this stablecoins algorithmic but tends to be “fixed” quickly due to the mechanisms that keep the price of UST stable.
These mechanisms, which were explained in detail in a report published by this means, basically consist of stimulating the market to burn (destroy) or emit UST to increase or reduce its circulating, as necessary. For each UST burned, the equivalent of 1 terra dollar (LUNA) is issued; and for each UST issued, the equivalent of 1 dollar of LUNA is burned.
Unlike other stablecoinsUST does not have a collateral in fiat money (as is the case with Tether), nor in other cryptocurrencies (as is the case with DAI). Its elastic supply is the only thing that keeps—or tries to keep—its price stable..
On this occasion, seeing that the price of UST did not quickly recover the expected value, its owners massively decided to exchange it for other stable cryptocurrencies. Anchor Protocol, the platform of decentralized finance (DeFi) used in the Terra ecosystem, had withdrawals for more than USD 2 billion in 24 hours.
Due to selling pressure, the price of UST started to slide down. It was in this context that yesterday, May 9, Fundación Luna (the organization behind the development of the network) deployed USD 1.5 billion to try to save the price of the stablecoin.
This amount of money – half in bitcoin (BTC) and the other half in UST – was placed in the hands of investment companies in order for them to operate in the market and exert buying pressure on UST.
Anyway, the flame of FUD (fear, uncertainty and doubt) it was already on. UST users fleeing the protocol and selling their coins to the first buyer that appeared, could more than the attempts of Fundación Luna to rescue it. And so the price reached USD 0.68.
According to some speculation, these movements resembling a “bank run” could have been intentional. In fact, many defenders of the Terra ecosystem are firmly convinced that it is an attack and they defend their idea by mentioning certain financial movements of some entities. Anyway, for now, those are just unconfirmed rumours.
The project leader promises a recovery plan
The South Korean Do Kwon, founder of Terra and director of Fundación Luna tweeted this afternoon what a recovery plan is on the way. In addition, he thanked the support he receives in this crisis, from those who trust him.
If the recovery plan calls for further deployment of Foundation reserves, or other attempts to steer the market towards what is good for the stablecoin, perhaps the narrative of decentralization that Do Kwon and his followers like to promote needs to be rethought.
“Anyone with UST will never sleep easy again”
Whether by an intentional attack, or by simple intrinsic flaws of the system, what happened reveals the fragility of the algorithmic mechanism by which Terra US seeks to maintain its value. The loss of confidence and the consequent drop in the price of LUNA discourage seigniorage, which should return UST to USD 1.
As CriptoNoticias reported, there is a majority consensus on the difficulty that the Terra ecosystem will have to recover its reputation, even if he managed to get the UST stablecoin back to trading at USD 1. For example, Argentine bitcoiner Nicolás Bourbón wrote, hours ago, that “anyone who owns UST will probably never sleep peacefully again.”
It is worth remembering that it is not the first time that UST has lost its parity with the dollar. He had already done it in the past, when he had less recognition, and also with a smaller market capitalization. On May 22, 2021, along with the crash of the entire cryptocurrency market, UST came to trade at USD 0.94. And, in December 2020, it went as high as $0.85.