What happened to one of the most significant projects in crypto?
TerraUSD (UST), a stablecoin that has been designed to have a price of $1, has lost its dollar peg for the second time in three days, falling to as low as $0.65 on Monday, the 9th of May, 2020. The price of LUNA, the native coin of a blockchain for UST, has dropped over 44% to $24 at the same time.
How does UST work?
You can exchange LUNA for UST dollar-to-dollar and vice versa, meaning that if LUNA is at $100, you can redeem it for 100 UST. As a rule, you can take 1 UST for $1 worth of LUNA, even if UST is worth less than $1. If UST is trading at $0.99, arbitrageurs can buy it and redeem it for $1 of LUNA. Traders seeking to profit from arbitrage opportunities regularly swap UST for Luna and back, thus ensuring the price stays close to $1.
How were the algorithms compromised?
Another stability factor of UST stablecoin is Anchor Protocol, which offered above-market interest rates of 20% on UST deposits on Terra’s blockchain, while competitors could give only around 0.4%-1%. That created a significant demand for the UST token as well.
However, those algorithms and the logic behind them were compromised.
The founder of Terra Do Kwon has retweeted, “today’s attack on Terra-Luna-UST was deliberate and coordinated. Massive 285m UST dump on Curve and Binance by a single player followed by massive shorts on Luna and hundreds of Twitter posts. Pure staging. The project is bothering someone. on the right path!”
Luna Foundation Guard (LFG), a nonprofit organization aiming to maintain and develop the Terra ecosystem, took over the damage control to mitigate further losses to the maximum extent and bring the stablecoin back to $1. Since the value of LUNA and the UST peg itself have been volatile, yesterday, LFG floated a total of $1.5 billion worth of Bitcoin to add much-needed liquidity to the ecosystem. LFG has also made loans to several trading companies to protect the UST peg. However, it is not known whether Bitcoin can prove to be completely stable support for a UST stablecoin.
Terra also exacerbated a more profound market decline by using its Bitcoin reserves to protect the dollar peg. Earlier today, the world’s largest cryptocurrency fell to a new yearly low of $29,731. Other participants in the Terra ecosystem have expressed confidence that UST will restore the peg shortly. Tron founder, Justin Su, tweeted that he was buying UST. This week, Tron also launched a stablecoin based on a similar mechanism called USDD.
Jose María Macedo, a member of the LFG Governing Council, stressed in a conversation with CoinDesk that there would be enough reserve funds to restore a stable UST price. However, critics of the organization believe that it has only “bought another day of time.”
The day was epic in the crypto world. Let’s see how this one will be turned out.