Terra peg mechanism raises many doubts when UST crashes to 61 cents

Since major sell-offs in the ecosystem began, Terra USD (UST) and its backing coin LUNA have taken a plunge in price and market valuation. By tapping into its bitcoin reserves, UST’s salvation may have exacerbated a bitcoin sell-off that brought BTC to its lowest price since July 2021.

UST, the third-largest stablecoin by market cap, appears to be in a catastrophic tailspin, having de-pegged from the dollar and falling to as low as $0.61 on May 10.

As its price has decreased, so has its market capitalization, as has Terra’s (LUNA), which backs the majority of UST’s value. To make matters worse, the market valuation of UST has far eclipsed that of LUNA, garnering intense scrutiny from the crypto world.

The price action prompted the custodian of Terra’s Bitcoin reserves, the Luna Foundation Guard (LFG), to snap up and quickly deploy 28,205 BTC in a bid to defend the peg by buying up UST and providing liquidity on exchanges. That action coincided with a modest recovery in UST’s price; it surged from lows in the $0.65 range to $0.78 as of press time.

As Bitcoin (BTC) fell by 10% on Monday alone, UST supporters and adversaries alike wondered how much LFG’s efforts to save bitcoin aggravated a sell-off that sent BTC to its lowest price since July 2021.

On Monday, as Terra supporters continued to express confidence, a gathering of longtime detractors chanted, “I told you so.” Some noted parallels between Terra and IRON Finance, a stablecoin that plummeted to zero last year in what was dubbed crypto’s first large-scale bank run.

Founder of Lyn Alden Investment Strategy, Lyn Alden has expressed her opinion on the matter on Twitter:

The Luna Foundation Guard (LFG), which is in charge of guaranteeing UST’s peg to the dollar, has been working hard to limit future losses and return the stablecoin to $1.00.

Its plan of acquiring Bitcoin to collateralize Terra USD has yet to bear fruit due to a variety of circumstances.

As the LUNA pricing and the UST peg itself appeared shaky, the LFG deployed $1.5 billion in BTC on May 9 to provide much-needed liquidity to the ecosystem.

The LFG had around 167,081 BTC worth approximately $3.5 billion as of May 5, when it announced the acquisition of an additional 37,863 coins.

As late as ten hours before the time of writing, Terra founder Do Kwon was unconcerned about market implications, tweeting “Deploying more funds – Steady fellas.”

Trouble began brewing for Terra this past weekend when major UST sell-offs from a Terra whale and precipitous withdrawals from UST’s Anchor money market briefly brought UST as low as $0.985 on Saturday.

UST’s heavy reliance on Anchor (ANC) has long caused tension between the stablecoin’s boosters and critics who say that Anchor’s yields are artificially inflated by Terraform Labs (Terra’s creators) and its big-money backers, like Jump Crypto and Three Arrows Capital.

Over time, critics say, Anchor would’ve been forced to reduce yields to the point where users would no longer have any incentive to lock up UST with the platform. In a world where there are few other uses for UST, such a scenario would have spelled trouble for the fledgling currency.

Amid Kwon’s quiet, retail Terra supporters, dubbed “LUNAtics,” looked to be coping with the prospect of a Terra collapse. One member of the 31,000+ Discord community described the price decreases as a “huge obstacle” that prevents observers from accepting “the entire notion of Terra + UST: decentralization.”

By 9:00 PM New York time, Terra’s Discord moderators had set “slow mode” to one hour to keep the LUNAtics’ anxiety at bay.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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