TerraUSD (UST) stablecoin, over the weekend, slightly lost its dollar peg and fell to $0.98 as against the usual $1.00. It, however, bounced back on Sunday.
Similarly, its native token (LUNA) plunged by almost 20% after its co-founder Do Kwon launched an FUD – fear, uncertainty and doubt- attack.
Between May 7 and 8, whales dumped over $285 million worth of UST, forcing LUNA to drop to $61, its lowest in the last three months.
These massive selloffs resulted in the price of UST to drop from $1.00 to $0.98. At the time of writing, UST trades at $0.995 while LUNA is exchanging hands at $62.18.
24-hour UST/USD price chart (Source: Trading View)
24-hour LUNA/USD trading chart (Source: Trading View)
Back in April, UST displaced BinanceUSD (BUSD) to become the third largest stablecoin in the cryptocurrency market. However, this recent depeg isn’t the first in Terra’s history. But the depegging is the first for the UST since it put out a bid to build out Bitcoin and Avalanche reserves.
The de-pegging and excessive supply
The de-pegging followed several withdrawals from Anchor lending protocol that gives high yields to UST depositors. As a result, deposits dropped to $11.2 billion, up from $14 billion.
Similarly, large withdrawals were made from liquidity pools on Curve (DeFi) protocol. Over $150 million of the withdrawn liquidity was from Terra creators. The company, however, claimed the withdrawal was to shuffle funds between pools. They later re-deposited $100 million as the price of UST began to decline.
Based on Terra’s elastic monetary policy, LUNA serves as a collateral to maintain UST’s dollar peg. As such, when UST is above $1.00, users are incentivized to burn LUNA and mint UST. But when UST is below $1.00, users are incentivized to burn UST and mint LUNA.
Similarly, UST supply reduction is directly proportional to LUNA valuation and vice versa.