Crypto News

LUNA falls ~50% in one day as UST Peg fails

The decentralized stablecoin lost its dollar peg and fell as low as $0.6841. Meanwhile, its sister token fell about 50%.

LUNA, Terra’s governance and staking token, has plunged around 50% over the past 24 hours after the ecosystem’s decentralized stablecoin UST lost its peg to the .

UST is an algorithmic stablecoin that uses LUNA to maintain its binding and has a significant impact on the token’s value.

UST fell as low as $0.68

Terra’s decentralized stablecoin UST, which just recently overtook Binance USD () to become crypto’s third-largest stablecoin, lost its dollar peg after a wave of sell-offs and uncertainty hit the crypto market. According to CoinMarkerCap, the stablecoin has fallen as low as $0.6841 in the past 24 hours.

UST is a decentralized stablecoin, meaning there is no centralized entity holding its reserve assets. Instead, the stablecoin uses LUNA to maintain its dollar peg through an algorithmic incentive mechanism.

This was through arbitrage-Enables traders who can take advantage of the inefficiencies in the relationship between LUNA and UST to profit from the difference while helping UST maintain its bond.

For example, if UST trades below its dollar peg, arbitrageurs can burn UST to mint LUNA. In this way, they decrease the supply of UST and bring its price back to a dollar while still making some profit. Similarly, if UST trades above its dollar peg, arbitrageurs can burn LUNA and mint UST, increasing the supply of UST and helping bring the price back down to the peg.

However, things started to turn sour for the stablecoin after large-volume withdrawals from Terra’s anchor protocol increased selling pressure. As reported, late last month more than 67% of the demand for UST came from Anchor, where around 12.5 billion UST tokens were locked. That number has now dropped to 8.5 billion UST tokens, meaning around 4 billion UST has been withdrawn.

Luna Foundation Guard used Bitcoin and UST valued at $1.5 billion

Selling pressure caused UST to lose its bond. Meanwhile, the sister token dropped the stablecoin, LUNA, even more. Luna’s sharp decline brought his market capitalization below that of UST, meaning merchants could not redeem UST for LUNA, potentially jeopardizing the very foundation of UST’s entire mechanism.

These forced the Luna Foundation Guard (LFG), a non-profit dedicated to maintaining the stability of the UST peg, to lend $1.5 billion to UST to defend the peg. Previously, Terra announced plans to buy $10 billion worth of bitcoin to use as collateral for its UST stablecoin.

In the last update, the organization said it had withdrawn 37,000 Bitcoin (worth over $1 billion) to lend. With that, the organization has completely emptied its treasury of all its bitcoin. “Very little” of the borrowed bitcoin has been spent, Luna Foundation Guard said, but it is “currently being used to purchase” UST.
LUNA falls ~50% in one day as UST Peg fails, Crypto Trading NewsLuna tweet

Some analysts believe that LFG, which is selling billions worth of Bitcoin to buy more UST, could take a toll on the entire crypto market. “That [action could] could add significant selling pressure on Bitcoin, dragging markets lower,” Corey Miller, head of growth at , told TechCrunch.

Bitcoin, the world’s largest digital currency, even fell below $30,000 at times over the past day, hitting its lowest level since July 2021.

Meanwhile, UST has recovered slightly and is currently trading around $0.92 at the time of writing, closer to its dollar peg. However, Luna is still deep in the red. The coin is trading at $33.48, down more than 43% over the past 24 hours.

Source: Crypto News Deutsch

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