- High selling volumes from UST pushed the stablecoin below the peg for several hours
- The LFG will lend $750 million from its BTC reserves to market makers for stability operations
Stablecoins pegged to the US dollar have only one task: to get as close to $1 as possible.
Any significant deviation from the one-to-one connection threatens to erode the confidence of stablecoin holders.
That was the case for Terra’s UST stablecoin over the weekend as it experienced its most significant test of stability since May 2021, briefly falling to around 98 cents on major decentralized exchange Curve Finance. Today, the Luna Foundation Guard (LFG) — tasked with defending the Stake and armed with $2.6 billion worth of bitcoin — guards the city walls.
UST is an algorithmic stablecoin that extends its offering by burning LUNA, Terra’s native asset. As demand for UST drives the price above a dollar, LUNA is burned to mint more and restore bonding. In the last 6 months, UST’s market cap has skyrocketed from just under $3 billion to over $18 billion.
As UST’s market cap grows, the supply of LUNA shrinks, pushing LUNA’s price higher. But the opposite is also true – if UST supply shrinks and the price falls below one dollar, LUNA will be minted and sold to restore balance.
Trouble started for UST after a $85 million transfercoming from the Terra blockchain through the Wormhole Bridge to Ethereum, was quickly sold on Curve on May 7th. Another $108 million in UST from the same Terra address was sent to the Binance exchange and sold.
Such large transactions significantly pushed the price on these exchanges off the shelf, which led to the beginning of large accounts withdraw VAT from borrowing and borrowing dApp anchor log in millions.
Anchor offers a subsidized yield that has been at 20% APR for most of its history, but was recently lowered to 18%. This is where the vast majority of VAT is deposited. Since the UST peg began to shake, Anchor’s deposits have fallen by nearly a quarter, with around $3.5 billion withdrawn.
After a tense few hours, Do Kwon from Terraform Labs went to twitter to calm the markets.
In a follow-up, he got philosophical and expressed confidence in the stability of the stablecoin.
“Those of you who are waiting for the earth to become unstable – I fear you will wait until the age of man has ended, the cities have turned to dust, the oceans are bone dry, the map of the continents has been redrawn and Dinosaurs are roaming the earth again.”
A major market operator started bulk selling Ether to rebalance the UST curve pool and prop up the price.
It’s unclear who caused the initial mass sale of UST, but critics have long argued that the available liquidity on exchanges is insufficient to support large-scale efforts to exchange UST for alternative stablecoins or fiat currencies.
Do kwon initially accused a single bad actor in a since-deleted tweet that misrepresented the percentage of users responsible for anchor payouts.
Caetano Manfrini, an attorney for Brazil-based GEMMA Ecosystem, told Blockworks he believes the sequence of events was well timed.
“I don’t know if all of these moves were orchestrated, but it seems to me that someone was waiting for a window of opportunity (BTC crash) in the middle of Saturday night…opportunists [have been] common since we existed in the market,” said Manfrini. “If it happened once, it will happen again.”
LFG deploys reserves
In a bid to restore confidence, LFG announced on Monday that it would loan a professional market maker $750 million in Bitcoin and an equal amount in UST to facilitate the arbitrage operations needed to maintain the dollar peg .
By Monday noon ET, this bitcoin had yet to be wagered, according to the LFG Reserves Dashboard. An LFG representative did not immediately respond to a request for comment.
Meanwhile, the price of a UST was again trading dangerously low, hitting 0.98% on major exchanges.
This is an evolving story.
The Luna Foundation Guard To Support Struggling UST Peg With BTC Reserves post is not financial advice.
Source: Crypto News Austria