Table of Contents
- Massive BTC Movement
- Terra's Volatile Weekend
- What's Behind The Slide?
- UST’s Mechanics Fail
- Luna Foundation Guard Intervenes
Luna Foundation Guard has announced that it would take decisive steps to proactively defend the larger Terra economy and the UST Dollar peg. The move comes after its algorithmic stablecoin, TerraUSD, fell below its $1 peg.
The foundation announced several measures, such as loaning $750 million worth of BTC to over-the-counter trading firms to protect UST's peg and another loan of $750 million worth to buy back the sold BTC.
Massive BTC Movement
Luna foundation Guard moved nearly $1.4 billion worth of BTC from an associated wallet, prompting many to question the ultimate destination of the transfer. Data revealed that 42,530.82827771 BTC was spent from the wallet, the destination unknown so far. Eagle-eyes sleuths on Twitter speculated that the transfer was split into two batches, with a part of it sent to the OKEX.
The developments come after the LFG announced that it would defend the UST peg and the broader Terra economy. Project founder Do Kwon clarified that LFG was not looking to exit its Bitcoin position, but was giving capital to a professional market maker to keep the UST peg stable.
Terra's Volatile Weekend
The algorithmic stablecoin, TerraUSD, has served up some serious volatility to investors over the weekend. Instead of trading at $1 like it's supposed to, the TerraUSD slipped against its peg, dropping to 99 cents. On Monday, it sank to 60 cents, far below its previous low of 92. While it recouped some of its losses and climbed up to 78, it was still quite some way off its dollar peg, a not-so-encouraging sign for investors.
Luna Foundation Guard released a statement explaining the situation,
"Over the past several days, market volatility across crypto assets has been significant. The market turmoil is also reflected by the past week's uncertain macro conditions across legacy asset classes."
What's Behind The Slide?
There is significant chatter on the internet around what caused the TerraUSD to become untethered. The drop happened against the backdrop of a massive selloff of crypto assets which included a significant slump in the value of Bitcoin and a retreat from risk assets. Currently, there are 18.5 billion UST in circulation, and price swings in the asset could have a significant impact and implications for other protocols and related coins.
Do Kwon, the founder of Terra and the brains behind UST, had committed to buying $10 billion worth of BTC in support of the coin. This further entwines the project with the world's largest cryptocurrency. Kyle Samani from Multicoin Capital put the developments down to a crisis of confidence, adding that he wasn't certain if UST would be able to pull through. This significantly raises the specter of this crisis snowballing into one of the biggest meltdowns in recent times.
UST’s Mechanics Fail
If the price of the Terra stablecoin falls below $1, traders are incentivized to swap UST for LUNA, removing UST from circulation. If the price is pushed above $1, then the mechanism occurs in reverse, removing LUNA from circulation for new UST. Arbitrage opportunities ensure that traders regularly swap UST for LUNA and LUNA for UST to ensure that the price stays at or close to $1.
Another significant factor in UST's price stability was the above-market interest rates offered through the Anchor Protocol. Anchor Protocol is a decentralized lender on the Terra blockchain, offering around 20% on deposits of UST. This translated into a significant demand incentive for the UST token. However, the weekend saw a catastrophic failure in these mechanisms, resulting in the UST losing its Dollar peg and LUNA's value sliding significantly.
Luna Foundation Guard Intervenes
The events over the weekend saw a series of quick interventions by the Luna Foundation Guard and Do Kwon. However, despite their efforts, the current price is still down 8%, as UST remains below its peg. Meanwhile, LUNA did not seem to be doing any better, with the token currently trading at $31, according to CoinMarketCap. Meanwhile, Multicoin's Somani summed up the events perfectly, stating,
"The biggest losers from all of this will be retail [investors] that didn't understand the risks they were taking."
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