TerraUSD (UST), one of the largest of the stablecoins — so-called because of its reliance on a stable asset such as a U.S. dollar — lost its dollar peg for the second time in three days Monday, falling to as low as $0.65 amid a broad selloff in crypto and global equity markets.
The Luna Foundation Guard, tasked with defending the peg, announced that it plans to loan $1.5 billion of its Bitcoin reserves to professional market makers to defend UST’s dollar peg, sending shockwaves through the crypto market.
Bitcoin investors are worried that billions of dollars in Bitcoin could be dumped into the market.
“There’s clearly significant risk in the market,” said Matt Hougan, chief investment officer at Bitwise Asset Management. ″Every professional investor in crypto has one eye on UST today, watching to see if it can maintain its peg to the dollar.”
TerraUSD was trading at $0.9328 as of this writing.
Stablecoins got their name because they are tied to the value of government-issued currencies, such as the dollar. These $1 pegs are usually backed by Treasurys, cash and other dollar debt that is easily sold in times of market stress.
Mostly used by speculators, stablecoins are often used as a place to park their money to avoid wild swings in crypto markets in lieu of regular dollars, Bloomberg reported.
Investors had sunk more than $18 billion into TerraUSD as of the weekend, making it the No. 3 stablecoin, but unlike traditional stablecoins, TerraUSD is an algorithmic stablecoin. “These pseudo dollars aren’t necessarily backed by any assets at all, instead relying on financial engineering to maintain their link to the dollar,” according to Wall Street Journal.
Market observers have criticized such algorithmic designs as risky because they rely on traders to push the value back to $1 rather than having assets that continuously support the price. If traders aren’t willing to buy them, the value of the coins can collapse.
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In the case of TerraUSD, if its price falls below $1, traders can “burn” the coin—or permanently remove it from circulation—in exchange for $1 worth of new units of another cryptocurrency called Luna.
As UST depegged, the price of Luna, its sister token, fell more than 50 percent to as low as $24.14 in 24 hours and was trading at $31.48 as of this writing, according to CoinMarketCap.
“#UST Market Cap is larger than that of Luna (the asset that is burned to synthetically create the pegged stablecoin)” tweeted Bitcoin analyst Dylan LeClair. “Not trying to spark any fear here, but if you have a large amount of UST, you might want to get out… A digital bankrun could be in the works.”
Do Kwon, the founder of Singapore-based Terraform Labs — which powers the Terra blockchain — and his team at the Luna Foundation Guard, promised earlier this year to buy as much as $10 billion in Bitcoin to support the stablecoin.
The $1.5 billion in loans will be denominated in both UST and Bitcoin to help support the digital currency, Bloomberg reported.
UST is meant to track the value of the dollar, like other stablecoins Tether and USDC, but unlike those cryptocurrencies, Terra doesn’t have cash and other assets held in a reserve to back its token. Instead, it uses a complex mix of code — alongside sister token Luna — to stabilize prices.
The world’s largest digital currency, Bitcoin briefly dropped below $30,000, hitting its lowest price since July 2021. It was trading at $31,372.75 as of this writing, now down more than 50 percent from its all-time high in November 2021.
Citing network congestion, Cayman Islands-based Binance, the No. 1 crypto exchange by market volume, said Tuesday it is temporarily stopping withdrawals of both UST and Luna “due to a high volume of pending withdrawal transactions.”
Withdrawals will resume once the network stabilizes, the company said.
“I think the market is expecting some forced selling here on the part of Terra and the reserve,” Nic Carter, co-founder of Coin Metrics, told CNBC. “It is a calamity but very expected. No algorithmic stablecoin has ever succeeded and this is no exception.”
Image: iStock / Andrey Suslov, https://www.istockphoto.com/search/2/image?mediatype=illustration&phrase=andrey+suslov