The Terra blockchain native stablecoin, a programmable stablecoin called UST, has lost its 1:1 peg to the United States dollar as a result of the massive selloffs seen in the crypto market. The token now trades at 92 cents, down 8% from the $1 peg.
UST made headlines in 2022 when the Luna Foundation Guard (LFG) founder, Do Kwon, committed to backing the UST programmable stablecoin with a $10 billion worth of Bitcoin. He promised to buy $3 billion worth in the short term and the rest in the long term.
This saw the stablecoin becoming the third-largest by market capitalization, surpassing Binance’s stablecoin, BUSD. In fact, the token currently ranks #9 by market capitalization despite losing its peg.
What you should know
This is the second time UST is losing its peg in the last three days. It has lost its dollar peg for the second time in three days, falling to as low as $0.92 on Monday, according to the most recent price estimates from Trading View.
On Saturday, UST dipped to as low as $0.985 before recovering to the $1 mark on Sunday.
The algorithmic stablecoin works together with its sister token, LUNA, to maintain a price of $1 using a set of on-chain mint and burn mechanics. In theory, these mechanics ensure traders can always swap $1 worth of UST for $1 worth of Luna, which has a floating price.
As UST has fallen off its $1 price, the price of LUNA has dropped 30% to $46 in the past 24 hours, according to CoinMarketCap.
Luna’s more significant decline puts its market cap below that of UST’s. That potentially throws the foundation of UST’s entire mechanism into jeopardy because it means a Terra bank run could lead to some users no longer being able to redeem their $1 of UST for $1 of LUNA.
UST’s loss of its $1 peg this weekend wasn’t the first or the largest losing of peg in Terra’s history, but it marked the first time the algorithmic stablecoin slipped below $1 since it embarked on its much-publicized bid to build out its bitcoin and avalanche reserves.
Today’s loss of peg comes after the Luna Foundation Guard (LFG) announced that $1.5 billion of its massive bitcoin reserves would be “loaned” out to professional market makers to proactively defend UST’s dollar peg.
Professional market makers are apparently using the BTC reserves to defend UST’s dollar peg, but there is no concrete link between the LFG reserves and Terra’s on-chain mint and burn mechanism.
There are proposals to bake Terra’s bitcoin reserves into its underlying smart contracts, but, as it stands now, there’s no way for users to directly redeem UST or LUNA for bitcoin.
However, it looks like the foundation will be throwing out all its BTC reserves to defend its peg as Dylan LeClair, a senior analyst at UTXO management, pointed out that the LFG wallet holding the BTC purchase has been emptied.
He stated, “LFG reserves wallet containing 42.5k BTC has just been emptied.” Looking through the wallet address he posted, 42,530.83 BTC has indeed been sent out of the LFG wallet to two wallets, one receiving 30,000 BTC while the other receiving the rest.
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