Terra Stablecoin peg drops below $0.90 - despite loan from Bitcoin reserves

• The Luna Foundation Guard $1.5 billion in reserve assets to support ground tanker interconnection.
• However, the price of the stablecoin, which should be $1, continued to fall.
• The decoupling comes amid a general downturn in the market.
• Terra's ground tank, the third-largest stablecoin by market cap, fell to $0.69 in Monday's trading, an all-time low according to CoinMarketCap data, even after Terra's backer Luna Foundation Guard accelerated a $1.5 billion loan to back the coin. On Coinbase, the listed price is down to $0.65.

Terra is a blockchain network

Terra is a blockchain network with a dollar-based stablecoin, UST. Unlike USDC and Tether, which are ostensibly backed by cash and bank assets, the UST stablecoin is designed to have a 1:1 parity with the US dollar through its algorithmic relationship with Terra’s native asset, LUNA. Mining LUNA requires burning the floor tanks and vice versa - and it's supposed to keep arbitrage opportunities as close to $1 as possible.

So, when the price drops, say, to $0.99 as it did over the weekend, traders can pounce to buy at a discount and then sell at $1.00 and pocket the difference. Order is theoretically restored because the free market does all the work.

But the Luna Foundation Guard (LFG), co-founded by Terra co-founder Do Kwon, wasn't entirely sure of its success, given the biggest crypto market crash of the past five days, which has seen cryptocurrency market cap swing from $1.8 trillion to 1.4 trillion dollars.

Therefore, over the weekend, I decided to take advantage of the support strategy that it had been following for the past few months. As of May 3, LFG has hoarded roughly $4 billion worth of Bitcoin, Avalanche, UST and LUNA in reserves that it could fall back on should the algorithm stop working.

As the stablecoin peg dropped to $0.985 this weekend, it voted to lend $750 million of bitcoin and $750 million in floor treasuries “to proactively defend the stability of the US dollar peg and the broader Terra economy, especially in light of volatility and uncertainty.” about macro. conditions." in the old markets.

The primary purpose of holding reserves of Bitcoin and other cryptocurrencies was precisely at this moment. But the solution hasn't made a difference yet.

Kwon tweeted today

Kwon tweeted today, just before UST slashed 6% of its price in one hour: "Posting more capital - steady lads."

Steady rejection, yes. Stable coin, not much.

As in most markets, it is impossible to say to what degree Terra's problems were a result of the cryptocurrency's decline and to what degree Terra helped cause that decline.

With Bitcoin already teetering thanks to investors turning against risky assets like stocks and cryptocurrencies, LFG - one of the largest single owners of BTC - sprayed even more into the open market, contributing to more than $250 million in liquidations over the past 12 hours, Like the price has fallen too low for leveraged traders to cover their bets.

What's at risk, then, may be not only Terra's long-term stability, but the near-term stability of the crypto ecosystem.