Ah, how the mighty have fallen. At time of writing, the UST algorithmic stablecoin has plummeted 57% in the last 24 hours and is trading at a mere $0.38, according to data from CoinMarketCap. Sister token LUNA’s price likewise has dropped over 83% in the last 24 hours and is trading at $5.43 at time of writing.
If you’ve read our previous articles on Terra, we talked about the Terra death spiral and how Terra needs to develop its ecosystem instead of relying on Anchor Protocol. For the uninitiated, here’s a brief recap:
Most UST are used in Anchor Protocol to reap rewards from Anchor’s high staking interest. This in turn burns LUNA and reduces LUNA supply. However, Anchor pays out the staking interest using its reserve fund, which is not sustainable in the long run. A death spiral would happen if investors decrease LUNA supply drastically, causing its price to drop. Alternatively, if UST were to break its peg, it could trigger a LUNA sell-off as well — which is what happened here.
Terra’s Moves (which worked for a while)
Anchor Protocol announced that it would dynamically adjust interest rates each month to keep the protocol sustainable. Terra-backed Luna Foundation Guard (LFG) also announced the very bullish news that it would buy $10 billion bitcoin for UST reserves. Kwon previously stated that the project will keep “growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for UST.” Oops.
Present: UST De-Pegs and Crashes
Over the weekend, massive UST sells triggered UST to lose its $1 peg and the stablecoin dipped to $0.985 on Saturday before recovering to the $1 mark on Sunday. If you thought this was it, UST lost its peg for the second time early this week, dropping to as low as $0.67 on Tuesday. This opened the floodgates for a UST sell-off. The LFG has since liquidated its bitcoin reserves in an attempt to support the peg.
We mentioned previously that Bitcoin is notoriously volatile and if its price drastically drops, the value of UST will be hit as well. Well, Bitcoin dropped to below $30k this week, triggering much FUD in the market and apparently among UST and LUNA holders.
In addition, we talked about how the development of the Terra ecosystem is important in determining the long-term success of LUNA and UST. However, from Terra’s previous move to buy bitcoin till now, we still only see DeFi protocol Anchor Protocol and not a Terra ecosystem. If you remove the fancy marketing and hype, UST and Anchor are simply an algorithmic stablecoin and deposit mechanism.
The LFG is now reportedly seeking large crypto investors to raise over $1 billion for UST. Apparently, investors are offered the opportunity to purchase LUNA tokens at a 50% discount, although these tokens would be subject to a two-year vesting schedule. But with Terra’s fall from grace, nobody knows if these investors will bite. Meanwhile, Do Kwon may have a “recovery plan”. As of time of writing, no details have been released.
Bonus: Thoughts from Crypto Twitter
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