Will TerraUSD (UST) become the latest stablecoin to fail?
That might be the most important question on the minds of investors in the stablecoin.
Terra’s price, which was inching upwards towards its 1:1 peg with the US dollar yesterday, crashed to 26 cents Wednesday morning. Traders also sold off their holdings of Luna – the underlying token responsible for maintaining Terra’s price peg, crashing its price to less than a dollar – a steep fall of more than 99% from its price a week ago.
As of this writing, both tokens have witnessed a revival in their fortunes. Luna is changing hands for $5.13 and Terra’s price is $0.48 to the dollar, according to data from Coinmarketcap.
Investor Concerns Spark Price Crash
The turmoil in Terra’s price began over the weekend, when it first lost its peg to the US dollar and traded for as low as $0.60 per pop. The Luna Foundation Guard (LFG), an entity created specially to maintain the price peg, announced Monday that it was lending $1.5 billion worth of UST and Bitcoin to induce demand for UST and stanch the price bleeding. Their move seemed to work, temporarily at least, as the price of Terra moved towards its target peg yesterday.
But it failed to allay the entirety of trader concerns, which range from a concentration of its holdings on a single platform to limited use cases, about the stablecoin. Amidst charges that Terra was a ‘confidence game’ and a ‘pretend stablecoin’, trader sentiment took a turn for the worst. Those concerns were further magnified due to Terra’s size. In less than a year, the stablecoin has become the world’s fourth biggest stablecoin. David Moreno Darocas, research analyst at CryptoCompare, told CNBC that UST’s price movements show the ‘fragility’ of algorithmic stablecoins. UST has grown to be both an integral and controversial piece of the crypto ecosystem,” he said.
A Fresh Start for UST?
Terra co-founder Do Kwon announced on Twitter that the stablecoin’s ‘price stabilization mechanism’ was absorbing excess UST supply in the market to prepare for a repeg of the cryptocurrency. For each Terra burned or removed from circulation, a corresponding Luna token is minted. This means that there is an excess supply of Luna in the market, leading to a decline in its price. In the last four days, 80 million new LUNA coins were issued even as 1.89 UST were taken out of circulation.
According to Kwon, LFG’s current moves are a precursor to an eventual fresh peg for UST. What this means in practical terms is unclear. In the past, he has suggested that UST might replace Luna with Bitcoin as collateral as it expands use cases for the stablecoin outside its own blockchain ecosystem. The logistics and efficacy of using a volatile asset like Bitcoin as a backstop for an algorithmic stablecoin remain unclear, however.