In brief
The Luna Foundation Guard deployed $1.5 billion in reserve assets to shore up UST’s peg.
Nonetheless, the price of the stablecoin, which should be $1, continued to drop.
The de-pegging comes amid a general market decline.
Terra’s UST, the third-largest stablecoin by market cap, dropped to below $0.90 in Monday trading, according to CoinMarketCap data, even after the Terra-supporting Luna Foundation Guard rushed a $1.5 billion loan to shore up the currency.
Terra is a blockchain network with its own dollar-based stablecoin, UST. Unlike USDC and Tether, which are ostensibly backed by cash and assets in the bank, the UST stablecoin is designed to hold 1:1 parity with the U.S. dollar via its algorithmic relationship with Terra’s native asset, LUNA. Minting LUNA requires burning UST and vice versa—and arbitrage opportunities are supposed to keep UST as close to $1 as possible.
So, when the price falls to, say, $0.99 as it did over the weekend, traders can swoop in to buy at a discount then sell at $1.00 and pocket the difference. Order is theoretically restored as the free market does all the work.
But the Luna Foundation Guard (LFG), co-founded by Terra co-creator Do Kwon, wasn’t so certain that would work, given the larger crypto market meltdown that’s been taking place over the last five days, which has seen the crypto market cap swing from $1.8 trillion to $1.4 trillion.
So, over the weekend it decided to make use of a backstop strategy it’s been pursuing over the past few months. As of May 3, LFG had stockpiled nearly $4 billion worth of Bitcoin, Avalanche, UST, and LUNA for its reserves that it could fall back on in case the algorithm stopped working.
As the stablecoin’s price peg slipped to $0.985 this weekend, it voted to lend out $750 million in Bitcoin and $750 million in UST to “proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.”
The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was for precisely this moment. But the solution hasn’t made a difference yet.
Kwon tweeted today, a little before UST shed 6% off its price in a single hour: “Deploying more capital—steady lads.”
Deploying more capital – steady lads
— Do Kwon 🌕 (@stablekwon) May 9, 2022
Steady declines, yes. Stable coin, not so much.
As in most markets, it’s all but impossible to determine to what degree Terra’s troubles were a result of the crypto downswing and to what degree Terra helped cause that downswing.
With Bitcoin already reeling thanks to investors turning against risk assets such as equities and crypto, LFG—one of the biggest individual holders of BTC—sprayed even more onto the open market, contributing to over $250 million in liquidations over the last 12 hours, as the price dropped too low for leveraged traders to cover their bets.
What’s at risk, then, may not just be the long-term stability of Terra, but the near-term stability of the crypto ecosystem.
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Source: https://decrypt.co/99849/terra-stablecoin-peg-slips-despite-loan-bitcoin-reserves
