Terra Stablecoin Peg slipped below $ 0.70 – despite a loan from Bitcoin reserves

Briefly

  • The Luna Foundation Guard has allocated $ 1.5 billion in reserve assets to support the UST framework.
  • Despite this, the price of stabilcoin, which should be $ 1, continued to fall.
  • Binding removal comes amid a general downturn in the market.

Terra’s UST, the third largest stable coins market capitalization, fell to $ 0.69 in trading on Monday, the lowest level of all time according to CoinMarketCap, even after the Terra-backed Luna Foundation Guard rushed with a $ 1.5 billion loan to bolster currency. On Coinbase, the price dropped as much as $ 0.65.

Terra is a blockchain network with its own dollar-based stablecoin, UST. Unlike USDC and Tether, which are reportedly backed by cash and bank assets, UST stablecoin is designed to maintain a 1: 1 parity with the U.S. dollar through its algorithmic relationship with Terra’s original assets, LUNA. LUNA forging requires burning UST and vice versa – and arbitration options should keep UST as close to $ 1 as possible.

So when the price drops to, say, $ 0.99 like it was over the weekend, retailers can jump in to buy at a discount and then sell for $ 1.00 and leave the difference. Order is theoretically established while the free market does all the work.

But the Luna Foundation Guard (LFG), co-founded by Terra co-creator Do Kwon, wasn’t so sure it would succeed, given the major crypto market crash of the past five days, which saw crypto market capitalization with 1, $ 8 trillion to $ 1.4 trillion.

So over the weekend, he decided to take advantage of the protection strategy he had been implementing for the past few months. As of May 3, the LFG was almost crowded worth $ 4 billion Bitcoin, Avalanche, UST and LUNA for their reserves to which it could return in case the algorithm stops working.

As the price of a stable coin dropped to $ 0.985 this weekend, it is voted borrow $ 750 million in Bitcoin and $ 750 million in UST to “proactively defend the stability of the UST-bound and wider Terra economy, especially in conditions of volatility and uncertainty of macro conditions in inherited markets.”

The whole point of maintaining a reserve of Bitcoin and other cryptocurrencies was right at this moment. But the solution has not yet made a difference.

Kwon tweeted today, shortly before the UST lowered its price of 6% in one hour: “Inserting more capital – calm guys.”

Constant decline, yes. Stable coin, not so much.

As in most markets, it is almost impossible to determine to what extent Terra’s troubles were the result of a decline in cryptocurrencies and to what extent Terra helped cause that decline.

As Bitcoin is already shaking thanks to investors turning against risky assets such as stocks and cryptocurrencies, LFG – one of BTC’s largest individual owners – has spread even further into the open market, contributing through $ 250 million in liquidations over the last 12 hours because the price has fallen too low for leverage traders to cover their bets.

What is at stake then may not only be the long-term stability of Terra, but also the short-term stability of the crypto ecosystem.

Editor’s note: This article has been updated with revised UST price figures.

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