Terra’s native stablecoin TerraUSD (UST) lost its peg to the US dollar this weekend. Falling as low as $0.98 after a whale dumped around $285 million worth of UST on Curve and Binance. While disturbance was kept minimal, UST briefly saw its dollar peg deteriorate up to 0.8% causing LUNA to lose around 20% of its value between May 7 and May 8, hitting $61, its worst level in three months.
- Whale sold around $285 million of UST
- Increased supply of UST led to LUNA losing 20% of its value in 24 hours
- UST went as low as $0.98
- Speculation about an intentional withdraw to crash LUNA
UST began losing its peg to the US dollar at around 9 PM EST on Saturday, May 7. At the same time, BTC and ETH had been dropping since Thursday, May 5. Fear washed over the crypto space after US Fed Chairman Jerome Powell’s FOMC press conference on May 4, where he announced a 0.5% increase in interest rates.
The downwards momentum continued into the weekend and persists today. Some analysts predict BTC at $30,000 by the end of the week as both BTC and ETH are now almost 50% down from November 2021 highs and the market looks set to enter a period of intense fear.
Alongside this negativity, news of Terra started to surface on May 8 as they encountered their first significant test. A whale holder sold around $285 million worth of UST on Curve and Binance. While disturbance was minimal, UST briefly saw its dollar peg deteriorate up to 0.8%. LUNA lost around 20% of its value between May 7 and May 8, hitting $61, its worst level in three months.
On May 8, a tweet from the official Twitter confirmed that someone started selling UST in large quantities. Further research shows that a lot of the funds originated over on Anchor Protocol, a popular savings, lending, and borrowing platform built on the Terra Blockchain. It offers passive income opportunities for depositors and provides borrowers easy access to collateral-backed stablecoin loans.
Anchor has been on a fast ascent up the TVL charts, having amassed over $17 billion since launching in April 2021 and accounting for more than half of the total TVL locked in Terra DeFi protocols. Anchor facilitates traders to deposit and withdraw into Curve pools. However, the withdrawal of funds means TVL in Anchor has now dropped to $12.8 billion at writing.
Crypto Twitter spotted the de-pegging early. Some spectators were quick to speculate that it might have been deliberate and coordinated, with selling taking place on both Curve Finance and Binance. It is worth noting here that this is speculation and that no solid evidence other than a whale selling off UST in large amounts exists at writing.
How are UST and LUNA connected?
The Terra protocol’s market module always enables users to trade 1 USD worth of LUNA for 1 UST, and vice versa, incentivizing users to maintain the price of LUNA. This same principle is true for all Terra stablecoin denominations. According to Terra’s elastic monetary policy, LUNA, amongst other assets, serves as collateral to maintain the UST dollar peg. Therefore, when the value of UST is above $1.00, the Terra protocol incentivizes users to burn LUNA and mint UST. Conversely, when UST’s price drops below $1.00, the protocol rewards users burning UST and minting LUNA.
Therefore, during a UST supply reduction, LUNA’s valuation should decrease. Likewise, when UST’s supply grows, LUNA’s valuation increases. The dumping of such a vast amount of UST negatively affected LUNA’s price. However, we are seeing intense buy pressure as LUNA now appears to have found support just under $58, which would fit with the 20-week moving average. However, considering the bear market sentiment we could expect more downside in the immediate future.
Another opportunity arose amid this scenario. In the Terra system, traders can always swap 1 UST for 1 LUNA. When UST dropped below its $1 peg, arbitragers descended and traded LUNA for discounted UST, to generate a profit. This mechanism helps maintain UST’s peg to USD because each time traders buy UST and swap it for LUNA, the Terra protocol removes that UST from circulation. The buying pressure on UST helps maintain its peg.
What does this all mean?
Firstly, it may have something to do with MakerDAO, the organization behind the DAI stablecoin. Terra’s CEO aimed at them a few weeks ago by opening a new Curve pool to suck the liquidity out of the DAI pool. Moreover, Terra’s success speaks for itself. They currently have two coins in the Top 10 by market capitalization, which seems to annoy somebody. By withdrawing such a large amount of UST, the investor must have known it would cripple LUNA? Or maybe not.
More importantly, although a 1% variation from the $1 peg isn’t unusual for stablecoins when markets are under pressure. In UST’s case, it’s been under $1 for more than 48 hours at writing.
Some analysts say this highlights the UST stablecoin as a liability for the broader cryptocurrency market. The Luna Foundation Guard, the organization that backs UST, has $3.5 billion in BTC ready to sell should it need to support UST. Interestingly, 93% of the reserves are in BTC, 3.5% in LUNA, and 3.5% in AVAX.
Curve is the primary protocol for stablecoin liquidity on Ethereum and is highly regarded as one of the most vital legos in DeFi due to its deep liquidity. Liquidity usually helps traders swap stablecoins like UST and USDC with minimal price impact. Therefore, since is so essential to DeFi, any sign of irregularity in its pools causes alarm. Ask the CEO of Terra Do Kwon what he thinks; he’s playing it cool, as his Tweet below from May 8 demonstrates.
Additionally, the bonding curves of Curve pools were designed in a way that they are capable of taking on some imbalance before shifting the price too much. A problem could occur from a liquidity pool perspective if the pool never reverts to a near 50/50 balance. Although Curve’s pools can absorb such imbalances, it would appear that panic among investors led to large selloffs of UST, mainly to buy other stablecoins, such as USDC. If this persists, Terra could find itself with a much bigger issue.
The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in various cryptocurrencies, including BTC, ETH, and RADAR.