The TerraUSD stablecoin has crashed losing its $1 peg and plunging to lows of $0.68 in the early hours of Tuesday. TerraUSD crash created a panic among the traders and holders about the mechanism of stable coins and it’s future
Over the weekend, TerraUSD provided investors with some serious volatility. Instead of trading at $1 as expected, the TerraUSD slid against its peg, falling to 99 cents. It fell to 60 cents on Monday, far below its previous low of 92 cents. While it recovered some of its losses and rose to 78, it was still quite far from its dollar peg, a not-so-good sign for investors.
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.
While the crypto community continues to try to figure out Terra’s ongoing pegging-de-pegging fiasco with its stablecoin offering TerraUSD (UST), major crypto exchange Binance temporarily suspended Terra (LUNA) and UST withdrawals on Tuesday.
Over the weekend, there was a massive surge in the Terra USD (UST) supply, which caused the price of the token to fall as low as under 99 cents
What is Reason Behind UST Token Price Crash?
Stablecoins get their name because they are linked to the value of government-issued currencies like the dollar. These $1 pegs are typically backed by Treasury bills, cash, and other dollar debt that can be easily sold during market stress.
The internet is buzzing with speculation about what caused the TerraUSD to become untethered. The drop occurred against the backdrop of a massive crypto asset selloff, which included a significant drop in the value of Bitcoin and a retreat from risk assets. There are currently 18.5 billion UST in circulation, and price fluctuations in the asset could have significant implications for other protocols and related coins.
If the Terra stablecoin’s price falls below $1, traders are incentivized to exchange UST for LUNA, removing UST from circulation. If the price rises above $1, the mechanism reverses, removing LUNA from circulation in exchange for new UST. Arbitrage opportunities ensure that traders swap UST for LUNA and LUNA for UST on a regular basis to keep the price at or near $1.
According to Ilan Solot, a partner at crypto hedge fund Tagus Capital LLP, the breaking of the peg began with a series of large withdrawals of TerraUSD from Anchor Protocol, a type of decentralised bank for crypto investors. Anchor Protocol, which is built on the same Terra blockchain network as TerraUSD, has been a major factor in the stablecoin’s recent growth, allowing crypto investors to earn nearly 20% annual returns by lending out their TerraUSD holdings.
The problem is that this ecosystem was designed so that $1 of UST could be claimed for $1 of LUNA — and now that both of them have crashed, there’s a real risk of a bank run as investors scramble to cash out.
Some traders panicked and sold after TerraUSD deviated from its peg. Others began selling ether and buying TerraUSD to restore the peg, putting pressure on the dollar value of the second-largest cryptocurrency by market value. Mr. Solot added that some traders sold bitcoin over the weekend in anticipation that the platform would need to sell its bitcoin reserves to support the peg. Bitcoin fell 10% Monday to around $31,076 amid a broad selloff in the cryptocurrency markets.
Binance Halts LUNA Withdrawals Amid UST Crash
The world’s largest cryptocurrency exchange announced early Tuesday that it had halted LUNA and UST withdrawals in response to an unprecedented stablecoin crash that had trembled the cryptocurrency market in recent days. “Due to a high volume of pending withdrawal transactions, withdrawals for LUNA and UST tokens on the Terra (LUNA) network were temporarily suspended on 2022-05-10 at 02:20 AM (UTC). Source: Binance Twitter
LUNA, the native token underpinning the Terra blockchain, shed 51.9% of its value in the past 24 hours and is currently trading at $29.81. Over the last 24 hours, the native token has wiped out nearly $11 billion in investor wealth. The coin is down 75% from its all-time high of $119.18 in April 2022.
Investors can always exchange one UST for one LUNA, or vice versa. The UST traded for LUNA is destroyed and removed from circulation each time this swap is performed. In contrast, whenever LUNA is exchanged for UST, that LUNA is destroyed.
This creates an appealing arbitrage opportunity for astute investors. This is because whenever UST falls below its dollar peg, there is an opportunity to purchase the discounted stablecoin and then swap (and destroy) it for $1 in LUNA. In this manner, an investor can profit handsomely while also removing UST from circulation and increasing buy pressure on the stablecoin.
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