Terra UST Loses Dollar Peg
On Tuesday, Terra’s UST, the world’s fourth-largest stablecoin, lost a third of its value, frightening cryptocurrency investors and contributing to bitcoin’s first plunge below $30,000 in 10 months. Stablecoins are digital currencies tied to traditional assets such as the US dollar. Traders use them to move money around and speculate on other cryptocurrencies, and they’re popular as safe havens when the crypto market is volatile.
Role of LFG
As part of its mission to construct a safety net for the stablecoin, the Luna Foundation Guard (LFG), the institution responsible for preserving UST’s dollar peg, has accumulated a war fund of 70,736 BTC. LFG used the last of their Bitcoin collateral at 8:50 a.m. To try to stabilize the UST the collateral was utilized on Monday.
To maintain the US Treasury’s dollar peg, the Luna Foundation Guard (LFG) stated on Sunday night that $1.5 billion of its vast bitcoin holdings will be “loaned” out to professional market makers.
Terra’s UST stable coin investors were affectionately referred to as “lunatics” before last week’s meltdown. This week, though, the nickname has lost any lingering levity. The stablecoin’s peg to the US dollar was expected to be maintained by balancing it with LUNA, the project’s native cryptocurrency.
The Luna Foundation Guard presently has no Bitcoin reserves and only modest amounts of other currencies, which limits its options for maintaining power. If UST is successful, it will be just another illustration of the crypto industry’s hubris. It risks pulling down other programs if it doesn’t.
Crypto Market Declines:
The wider cryptocurrency sector has been declining in lockstep with regular financial markets. Early Tuesday, Bitcoin fell below $30,000 for the first time since July 2021, behind other traditional “risk-off” assets like tech stocks but also being dragged down by the TerraUSD sell-off.
The world’s most widely held cryptocurrency had also rebounded somewhat by Tuesday afternoon, hitting $31,272. By Thursday 11:50 AM UTC, it again went down below $30k. These drops, which correlate with a dip in risk appetite, go counter to some crypto enthusiasts’ assumption that cryptocurrencies are a gold-like store of value.
Bitcoin has dropped more than half of its value since reaching an all-time high of $69,000 in November 2021. While bitcoin is now holding at a key support level, analysts at Singapore’s QCP Capital warned that “there is a tremendous tail risk from the (TerraUSD) de-peg combined with macro issues.”
Conclusion:
There is presently no link between Terra’s on-chain minting and burning procedure and the LFG reserves. Although Terra intends to include its bitcoin reserves into its smart contracts, customers cannot yet swap UST or LUNA for bitcoin. The question of whether this is even possible now that the reserves look to be practically depleted has become even murkier.