TerraUSD was created to offer a 1-to-1 peg against the U.S. Dollar. Do Kwon’s Token fell to 60 cents during a broad sale
Algorithmic stablecoins are, like their “traditional” counterparts in crypto, supposed to bring calm amid the chaos. However, investors in one of these tokens are quickly discovering that they can be a lightning rod for volatility.
The TerraUSD coin or UST fell to 99 cents over the weekend, rather than trading at $1 as intended. It had fallen to 60 cents by Monday night in New York. This was a dramatic drop from its May 2021 low of 92c. It has recovered its losses and fluctuates between 90 cents to $1, a sign that it is in trouble.
The topic of what caused Terra’s cryptocurrency to become untethered has been a hot topic on the internet. This happened in tandem with a sharp selloff of cryptoassets, including a drop in Bitcoin to $30,000 and a wider retreat from risk assets , including stocks. It doesn’t matter what the catalyst was, it is significant: According to CoinMarketCap there are approximately 18.5 billion UST in circulation. This is a large enough number that any swings could have serious consequences for other currencies and protocols. Do Kwon, the crypto-asset market pioneer behind UST, previously pledged to buy as much as $10 Billion worth of Bitcoin as part his support for the coin.
Kyle Samani, Multicoin Capital, stated that “it’s quite clear that there is an crisis of confidence.” He said that it wasn’t certain that UST would survive. This raises the possibility that the current turmoil could snowball into one of crypto’s biggest blowups in recent history.
Tether’s USDT and Circle’s USDC are both conventional stablecoins. They claim that the tokens they issue are backed by cash or high-rated bonds. They can be exchanged easily for cash or liquid cash equivalents, so they hold their peg. Algorithmic stablecoins, on the other hand, attempt to maintain their value by using a combination software program and active treasury administration. UST, which works in tandem with Luna, is the most controversial of these types of tokens.
Terra’s Mechanics
Terra’s stablecoin is an example. If its price falls below $1 traders are incentivized swap units of UST with Luna. This removes the former out of circulation. Software programs can also be triggered to do so. If the price rises above $1, then the reverse mechanism is applied – take Luna tokens out of circulation to create equivalent units of UST.
Traders who seek to make money from arbitrage opportunities frequently swap UST for Luna, which ensures that the price remains at or very close $1. Anchor Protocol, a “decentralized lending platform” built on Terra’s blockchain, offered crypto’s equivalent to above-market interest rates. This helped UST’s stability. Anchor offers rates around 20% for deposits of UST. This was a substantial demand incentive for the token.
All of these mechanisms were not working over the weekend. UST also lost its dollar peg. Luna, however, fell in value. This led to a series crypto market interventions by Kwon and so-called council at the Luna Foundation Guard (LFG), which is a consortium of crypto players including Kanav Kariya, Jump Crypto. Jump Crypto declined comment. UST remained under pressure at midnight New York Time on Monday. According to CoinMarketCap, Luna was trading at $29, 52% less than a day before.
According to a profile by Singapore’s Accounting and Corporate Regulatory Authority, LFG was incorporated December last year. Kwon is listed in the director’s list. Kwon splits his time between Seoul and Singapore . He did not immediately respond to a request for comment.
Multicoin’s Samani stated that retail investors who didn’t fully understand the risks involved will be the biggest losers.
