- LFG has deployed its BTC reserves, but $1 billion in circulating supply contraction has so far failed to restore the dollar peg as UST trades at 90 cents
- Critics have long worried about the viability of an undercollateralized stablecoin
Retail users who have relied on Terra’s Anchor Protocol for a secure, high-yield savings account are waking up to an uncomfortable new reality.
Terra USD (UST) has been trading well below its dollar peg since Saturday, but the initial drop to 98 cents proved the prelude to a much larger decline. It even caught the attention of US Treasury Secretary Janet Yellen, who quoted UST by name in testimony before Congress today.
As Kwon’s Terraform Labs and the Luna Foundation Guard work to restore regularly scheduled programming, the question is: Can the project be saved? And how?
The formerly stable coin has temporarily slipped to almost 70 cents in the last 24 hours, according to CoinGecko. This ongoing decoupling has led to mass withdrawals from the preeminent Terra blockchain dApp Anchor, whose deposits have plummeted by about $7.8 billion.
The net supply decline at UST is already approximately $1 billion. As each UST is redeemed for $1 worth of LUNA, their offering expands. Around 25 million LUNA since the riots began on May 7th have been coined through the protocol.
The increased supply has decimated the price of Terra’s native asset, which has fallen 64% over the past week, according to data compiled by Blockworks.
On Tuesday, Terra mastermind Do Kwon again attempted to allay concerns via Twitter by positing an impending — though unspecified — recovery plan.
After collapsing to 92 cents Monday at 2:30 p.m. ET, UST appeared to stabilize over the next few hours, but conditions deteriorated rapidly from around 6:15 p.m. when UST began a relentless two-hour decline to a low of around 65 Cent.
Unlike the weekend price action, which focused on UST trading via centralized exchanges and the Ethereum Dex curve, this time the extreme volatility has derailed UST from the Terra chain itself. The speed of the descent overwhelmed the intended arbitrage-based stabilization mechanism built into the protocol design, which has a gross impact $290 million soft cap per day for redemptions at $1.
Exceed the cap and the spread – the amount of LUNA that a UST can be redeemed for – is said to widen. The concept is designed to prevent tampering with the mechanism, but it also makes it an arduous drudgery to recover from such a severe shock.
Algorithmic stablecoins remain very experimental and have failed spectacularly before. Most recently, Waves-based stablecoin USDN collapsed to 77 cents in early April and has never fully recovered. It used a roughly similar Burn and Mint stabilization mechanism as USTs, and the platform’s WAVES token has it dropped by 80% since.
UST itself suffered as a result a similar crash caused by volatility in May 2021 when it briefly reached 96 cents. But on a 1 year chart that now appears as a small bump along the way.
Many members of the Luna community who call themselves “maniacs” have expressed support for the record and its supporters, even in difficult times. But for some it was a catastrophic loss, regardless of whether the bond ultimately recovers.
According to Mark Richardson, head of research at Bancor, a decentralized exchange and liquidity protocol, the instability comes as no shock to crypto veterans.
“If you ask anyone in the industry whether or not this is a surprise at all, everyone will tell you they’re surprised this didn’t happen sooner,” Richardson told Blockworks.
Cryptocurrency Luna Lurches as Terra USD Volatility Continues, Erasing Billions post is not financial advice.
Source: Crypto News Austria