While the entire crypto market was in the red over the weekend, Terra (LUNA) experienced a significant decline and its original USD-backed stablecoin, TerraUSD (UST), was having a hard time maintaining its parity.
UST is an algorithmically stable currency and relies on market incentives to maintain its peg to the dollar. In addition to a firing mechanism involving the LUNA token, which is used as part of Terra’s governance process, UST is also supported by an ever-growing pool of digital assets, including Bitcoin, which can be used to defend stablecoins market parity with the dollar. When the value of UST is above $ 1.00, the Terra protocol asks users to burn LUNA and press UST. Conversely, when the price of UST drops below $ 1.00, the protocol rewards users for burning UST and hitting LUNA.
It appears that the fall of UST started after massive withdrawals of anchor, a DeFi protocol that offers one of the highest levels of return on the market to users who deposit UST. The LUNA / USD pair fell 20% between May 7 and May 8, reaching $ 61, the worst level in three months after a portfolio liquidated $ 285 million of UST. After this fall, UST briefly lost its bond to the US dollar and fell as low as $ 0.98. To some observers, this sales operation looks like a deliberate and coordinated attack.
On his side, Make Kwonfounder of the Terra Protocol, seems to care exaggerated and chose humor to dampen the tense situation on Twitter. Some have noticed that one purse in particular was behind the Terra rescue operation and that it is believed to belong to Hop Cryptoa financial company affiliated with Terra and Terraforms Labs. The same company would also have intervened to support Solana after the blockchain attack via a “wormhole” bridge.
This Monday, Luna Foundation Guard (LFG) has executive order that it would borrow $ 750 million in bitcoins and $ 750 million in stablecoin UST to defend the latter’s parity during this period of market volatility.
Do Kwon added that although UST buying and selling is now not significantly directional, “we felt it was important to have capital ready to implement in the current market.” He also wrote that “as the markets recover, we expect the loan to be repaid to us in BTC, increasing the size of our total reserves.”
This is not the first time that the parity between the dollar and UST has fallen below 1. In May 2021, UST had to face “extreme volatility” and fell temporarily to $ 0.96 before recovering. It should be noted that despite the difficult assumption about the crypto markets, LFG continued with a further acquisition of bitcoins. Luna Foundation Guard’s reserves are currently distributed as follows: 93% are denominated in BTC, 3.5% in Luna and 3.5% in AVAX (Avalanche).
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