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The UST stablecoin project lost its peg to the US dollar and now it’s crashing

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Earlier this week the Terra Labs’ TerraUSD, or UST, stablecoin lost its parity with the U.S. dollar. Now it and its sister currency LUNA market values are in freefall as the project attempts to salvage itself.

UST is a type of cryptocurrency that attempts to “peg” itself to the dollar by matching itself at all times so that one coin is always $1. The project calls it an “algorithmic stablecoin” which means that it uses a complex mechanism involving its related token known as Luna to keep that peg.

The algorithm uses the supply of UST and Luna to maintain its peg. UST is created by burning – or destroying – Luna, which decreases Luna’s supply to increase UST’s supply and vice versa. The platform also has an arbitrage mechanism that allows traders to buy and sell the two tokens in order to help stabilize the prices.

In times of high volatility, this doesn’t always work correctly and sometimes UST can drift slightly from the U.S. dollar for a brief time. However, nothing has ever been as severe as happened in the past few days.

On Sunday, a massive sell-off of UST caused the stablecoin to lose its peg and it fell to 99 cents against the dollar. That trend would continue to worsen over the next few days as UST hit a low of 26 cents this morning. It is now trading at 50 cents. Luna has lost more than 95% of its total value since Sunday and now trades near $2.50.

In an attempt to defend its peg and maintain stability, Terra Labs Chief Executive Do Kwon said on Sunday that the company would “deploy $1.5 billion” of bitcoin via the Luna Foundation Guard, a non-profit that supports the Terra ecosystem. This included lending $750 million worth of bitcoin to trading firms to “protect the UST peg” and 750 million more UST to lend out for more bitcoin “as market conditions normalize.”

The unwinding of UST and Luna has followed along with a sudden decline in the market value of Bitcoin, the largest and most popular cryptocurrency. Bitcoin’s value dropped below $30,000 this morning, dropping back to its lowest level since July 2021. Ethereum, Bitcoin and other cryptocurrencies have been declining, somewhat sharply, since early May.

For his part, Kwon is not admitting defeat even as UST and Luna continue to lose value. This morning he tweeted several potential fixes that will help stabilize the price of Luna and bring UST back into peg with the dollar.

“I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” Kwon wrote on Twitter.

Photo: Pixabay

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