Major sell-offs crash TerraUSD and its backing coin LUNA
Yesterday we reported that the Terra UST stable coin had lost its peg to the US dollar and slipped to a low of $0.97 on Monday, May 9. Increased selling pressure on LUNA, which has lost over 60% in the last few days, has caused UST to slip to $0.66, bringing Terra’s dollar peg mechanism into serious doubt.
Terra’s UST stablecoin is the fourth largest stablecoin by market capitalization and appears to be in a downward spiral that it seemingly can’t counteract. In the early morning hours on Tuesday, May 10, its price dipped as low as $0.66, that’s $0.34 away from its $1.00 peg and brings the pegging mechanism into serious doubt. It has now pulled back to around $0.90, but this is far from ideal.
Meanwhile, the Terra blockchain native token LUNA has also been in free fall, dropping to $29 from $85 in the last six days. Alongside the falling price of LUNA is falling market capitalization for LUNA, which backs the majority of the value of UST. The real issue is that the market cap of UST has surpassed that of LUNA by around $6 billion. If the market cap of LUNA is lower than UST, it is conceivable that Terra does not have enough funds to properly back the value of the stablecoin and maintain its peg.
At writing, the price of UST is $0.90 with a market cap of $16.2 billion, while LUNA has been in a freefall, collapsing to $29.41. This has caused massive liquidations on leveraged positions, dropping its market cap to $12.3 billion.
What about all that BTC Terra bought?
The Luna Foundation Guard (LFG), which is in charge of ensuring UST maintains its peg to the US dollar, has been engaged in damage control to stop any further losses and return the stablecoin to its correct $1.00 peg. One method being employed relies on the more than 160,000 BTC purchased by the foundation and a further almost 38,000 BTC purchased on Friday, May 6.
As the LUNA and the UST peg price became unstable, the LFG deployed $1.5 billion worth of BTC on Monday, May 9, to add liquidity to the ecosystem. The LFG loaned to trading firms to protect the UST peg. However, the timing could not worsen as BTC slid 25% in the same time frame as all this unfolded. The notion that BTC could provide backing for a dollar-pegged stablecoin is being pushed to the limits. Moreover, The LFG’s continuous adjustments to its UST stablecoin attracted unwanted attention from decentralization maximalists who now refuse to think of Terra as decentralized.
Others were quick to point out the differences and mechanics of stablecoins, highlighting user error instead of any wrongdoing. Ultimately the road ahead for UST has just forked. One way leads to more adoption and stability, while the other leads to UST de-pegging from the US dollar, causing a domino effect across the industry that could be disastrous.
We will continue to track the story as it unfolds.