The UST stablecoin deviates significantly from the dollar peg
Here's the latest
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UST fell to $0.65 on Monday, indicating a possible collapse of the market-leading algorithmic stablecoin.
The LUNA, the shock absorbers in the floor tanks, are down 50% to $30.
The Luna Foundation Guard
The Luna Foundation Guard, the entity responsible for maintaining the stablecoin peg, has exhausted its $1.5 billion bitcoin reserves and bought an additional $850 million in BTC in an effort to defend the peg.
The move may have created selling pressure that contributed to the 10% drop in bitcoin's price on Monday.
On Tuesday morning, floor treasuries returned to $0.90 after LFG posted an additional Bitcoin to maintain the peg.
Algorithmic stable UST lost its $1 peg for the second time in three days on Monday, dropping to $0.65 according to the latest price estimates from CoinMarketCap. Since UST has “decoupled,” the price of LUNA, its sister token, has fallen by 45% to $33 in the past 24 hours according to CoinMarketCap.
Luna Foundation Guard (LFG)
- The price action prompted Terra's bitcoin custodian, Luna Foundation Guard (LFG), to snap up and quickly spread 28,205 bitcoins in an effort to defend the peg by buying underground vaults and providing liquidity on exchanges. This measure coincided with a modest recovery in the price of floor tanks. It has risen from the lows of $0.65 to $0.78 to press time.
- On Tuesday morning, floor treasuries returned to $0.90 as LFG's bitcoin reserves outpaced depleted supply on exchanges. Luna also recovered from the low of $23.16 to $28.81.
- With bitcoin down 10% on Monday alone, believers and detractors from underground treasuries alike have pondered how much worse LFG's attempts to redeem the bitcoin sell-off that have sent BTC to its lowest price since July 2021.
- As TERRA supporters continued to express confidence on Monday, a mob of longtime critics was quick to say, "I told you so." Some have even drawn parallels between Terra and IRON Finance, a stablecoin that plunged to zero last year in what has been called the first large-scale crypto banking operation.
- “There are still enough reserves to support the peg,” Jose Maria Macedo, a member of the LFG board, told CoinDesk earlier today.
- UST, a so-called stable algorithm, is working with LUNA to maintain the $1 price using game theory and a set of blockchain-based mint-and-burn mechanisms. In an ideal world, these mechanisms would ensure that traders could swap $1 of floor-to-ceilinged treasuries for $1 of LUNA, which has a variable rate and is intended to act as a kind of shock absorber for the price swings of floor-to-ceilinged treasuries.
- Centralized stablecoins like USDC and Tether form the basis of Decentralized Finance (DeFi) with their fully collateralized answers to digital dollars, but Terra’s “decentralized” UST stablecoin has been swinging recently with a market cap of over $18 billion.
- Terra says its algorithmic stablecoin will rip power away from central institutions and failed monetary policies. Skeptics claim that the entire system is a Ponzi scheme backed by fake memes and basics, and whales.
- A collapse of underground reservoirs would send waves through the entire DeFi industry, and would sound alarm bells for regulators noticing that retail investors grab the bag.
- The shape of things to come Problems began brewing for the Terra last weekend, when large land tank sales of Terra whales and quick withdrawals from the Anchor money market in land tanks briefly sent UST down to $0.985 on Saturday.
- Last Friday, 75% of the trading floor tanks were deposited in Anchor, which in the past attracted investors with annual returns of 20%.
- Underground reservoir deposits in Anchor fell from $14 billion to about $7 billion amid a 72-hour price crash in ground reservoirs.
- UST's heavy reliance on Anchor has long caused tension between stablecoin boosters and critics who say Anchor's revenue was artificially inflated by Terraform Labs (Terra's creators) and its big-money backers, such as Jump Crypto and Three Arrows Capital.
- Critics say that over time, Anchor would have had to reduce returns to such an extent that users would have no incentive to lock down floor cabinets with the platform. In a world where there are few other uses for UST, such a scenario could cause problems for the nascent currency.
- To allay these and other concerns, Terraform Labs CEO Do Kwon made a massive bitcoin purchase in order to create a kind of UST partial reserve. Bitcoin reserves, which have no tangible connection to the smart contracts backing Terra’s UST stablecoin, have entered the hands of the newly formed LFG.
- LFG announced on Monday that it will lend reserves for the first time to professional market makers in a bid to defend the peg of underground reservoirs.
- Reserve funds, which were topped with an additional $850 million on Monday, were used to defend the peg of floor vaults on exchanges such as Binance and Curve.
- While LFG board member Macedo expressed optimism to CoinDesk that BTC reserves would be enough to bring terrestrial treasuries back to $1, not everyone agreed.
- According to Kevin Gallois, hedge fund manager and critic of Terra, “[Terra] has barely bought itself a day with its $750 million defensive game.”
- “At this point, either let the LUNA bleed the maximum convertible amount per day or recapitalize the floor tank debt for cents on the dollar. So either cut the floor for the floor tank holders or leave the LUNA holders incur a heavy loss,” Galois wrote to CoinDesk.
- Perhaps the most significant outcome of Monday's price action is that Luna's market value has fallen below that of floor tanks. This potentially jeopardizes the entire stabilization mechanism in the ground tanks, which is based on the idea that 1 ground tanks can always be traded for $1 of LUNA.
- If the ground tanks are a higher value than the LUNA, the Terra risks becoming insolvent in the event of a bank run.