Terra USD (UST) loses its dollar peg as Whale sheds $285 million

UST lost its peg to the US dollar, falling to as low as $0.98 Terra’s native stablecoin, TerraUSD (UST), lost its peg to the US dollar this weekend. Dropping as low as $0.98 after a whale dumped around $285 million worth of UST on Curve and Binance. While the shock remained minimal, UST briefly saw…


UST lost its peg to the US dollar, falling to as low as $0.98

Terra’s native stablecoin, TerraUSD (UST), lost its peg to the US dollar this weekend. Dropping as low as $0.98 after a whale dumped around $285 million worth of UST on Curve and Binance. While the shock remained minimal, UST briefly saw its dollar peg deteriorate to as low as 0.8%, causing LUNA to lose around 20% of its value between May 7 and 8, reaching $61, its worst level in three months.

Summary

  • Whale sold about $285 million of UST
  • Increased UST supply led LUNA to lose 20% of its value in 24 hours
  • UST was as low as $0.98
  • Speculation about an intentional withdrawal to crash LUNA

UST began to lose its peg to the US dollar around 9 pm EST on Saturday, May 7. At the same time, BTC and ETH had been falling since Thursday, May 5. press conference on May 4, where he announced a 0.5% increase in interest rates.

The downward momentum continued through the weekend and persists today. Some analysts are predicting BTC to hit $30,000 by the end of the week as both BTC and ETH are now almost 50% down from November 2021 highs and it looks like the market will enter a period of intense fear .

Along with this negativity, news of Terra began to emerge on May 8 when they encountered their first significant test. A whale keeper sold around $285 million worth of UST on Curve and Binance. While the shock was minimal, UST briefly saw its dollar peg deteriorate as much as 0.8%. LUNA lost around 20% of its value between May 7 and 8, reaching $61, its worst level in three months.

curve wars

On May 8, a tweet from Curve’s official Twitter confirmed that someone has started selling UST in bulk. Further investigation shows that many of the funds originated from the Anchor Protocol, a popular savings, loan, and lending platform built on the Terra Blockchain. It offers passive income opportunities for depositors and gives borrowers easy access to collateral-backed stablecoin loans.

Anchor has seen a rapid rise up the TVL charts, having amassed over $17 billion since its launch in April 2021 and accounting for more than half of the total TVL locked in Terra DeFi protocols. Anchor makes it easy for traders to deposit and withdraw funds into Curve funds. However, the withdrawal of funds means that TVL on Anchor is now down to $12.8 billion at the time of writing.

Crypto Twitter spotted the decoupling early. some viewers they were quick to speculate that it might have been deliberate and coordinated, with sales on both Curve Finance and Binance. It’s worth noting here that this is speculation and no hard evidence exists apart from one whale selling UST in large numbers at the time of writing.

How are UST and LUNA connected?

The Terra protocol market module always allows users to exchange 1 USD of LUNA for 1 UST, and vice versa, incentivizing users to hold the LUNA price. This same principle is true for all Terra stablecoin denominations. In accordance with Terra’s elastic monetary policy, LUNA, among other assets, serves as collateral to maintain parity with the US dollar. Therefore, when the value of UST is above $1.00, the Terra protocol incentivizes users to burn LUNA and mint UST. Conversely, when the price of UST drops below $1.00, the protocol rewards users who burn UST and mint LUNA.

Therefore, during a UST supply reduction, LUNA’s valuation should decrease. Likewise, when the supply of UST increases, the valuation of LUNA increases. The dumping of such a large quantity of UST negatively affected the price of LUNA. However, we are seeing intense buying pressure as LUNA now appears to have found support just below $58, which would be in line with the 20-week moving average. However, considering the bearish market sentiment, we could expect more declines in the immediate future.

Another opportunity arose in the middle of this scenario. In the Terra system, traders can always exchange 1 UST for 1 LUNA. When UST fell below its parity of $1, the umpires went down and traded LUNA for UST at a discount, to make a profit. This mechanism helps keep UST pegged to USD because every time merchants buy UST and exchange it for LUNA, the Terra protocol removes that UST from circulation. Buying pressure on UST helps maintain its parity.

What does this all mean?

First of all, it may have something to do with MakerDAO, the organization behind the DAI stablecoin. Terra’s CEO addressed them a few weeks ago by opening a new Curve group to absorb liquidity from the DAI group. Furthermore, the success of Terra speaks for itself. They currently have two coins in the Top 10 by market cap, which seems to bother someone. By withdrawing such a large amount of UST, the investor must have known that it would cripple LUNA? Or maybe not.

More importantly though, a 1% move from $1 parity is not unusual for stablecoins when markets are under pressure. In the case of UST, it has been below $1 for over 48 hours at the time of writing.

Some analysts say this highlights stablecoin UST as a liability for the broader cryptocurrency market. Luna Foundation Guard, the organization that supports UST, has $3.5 billion in BTC ready to sell should it need to support UST. Interestingly, 93% of reserves are in BTC, 3.5% in LUNA, and 3.5% in AVAX.

Curve is the main protocol for stablecoin liquidity on Ethereum and is highly regarded as one of the most important laymen in DeFi due to its high liquidity. Liquidity generally helps traders trade stablecoins like UST and USDC with minimal price impact. Therefore, since Curve is so essential to DeFi, any sign of irregularity in its pools raises alarm. Ask the CEO of Terra Do Kwon what he thinks he is; he’s playing it cool, as evidenced by his Tweet below from May 8.

In addition, Curve pools’ linkage curves were designed in a way that they are able to assume some imbalance before changing the price too much. A problem could occur from a liquidity pool perspective if the pool never returns to a balance close to 50/50. Although Curve groups can absorb such imbalances, it would appear that panic among investors led to large UST sell-offs, mainly to buy other stablecoins, like USDC. If this persists, Terra could be in for a much bigger problem.

The foregoing does not constitute investment advice. The information provided here is purely for informational purposes only. Please exercise due diligence and investigate. The writer holds positions in various cryptocurrencies including BTC, ETH, and RADAR.


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