Against the background of the collapse of the cryptocurrency market, the algorithmic stablecoin of the Terra ecosystem – TerraUSD (UST) – was again pegged to the US dollar. On the night of May 10, the price of the asset fell below $0.62 (Coinbase).

Due to the incident, cryptocurrency exchange Binance has temporarily frozen withdrawals on the Terra blockchain. Users drew attention to the platform’s empty order book.

Bidding below $0.70 is not due to a lack of demand. It is absolutely not possible to submit orders via the frontend/API. i don’t know what’s going on

— Hasu (@hasufl) 10 May 2022

At the time of writing, the UST is trading around $0.91.

TerraUSD is one of the largest dollar stablecoins. According to CoinGecko, its capital exceeds $16 billion. The prices of the two assets are closely related, as the burning mechanism of the native cryptocurrency LUNA is used to issue UST.

“The existence of such a relationship creates significant inflationary risks that arise when stablecoins are withdrawn from the Terra ecosystem. Such a study of market processes shows that the withdrawal of a significant amount of UST from circulation does not affect the value of the latter due to arbitrageurs, but the transaction stimulates a decrease in the price of LUNA. In the context of the downtrend in the market and in the presence of negative news, a significant decrease in the value of the cryptocurrency can be observed,” he said. idea.

In the last 24 hours, LUNA has lost more than 40% of its value and is trading around $36 at the time of writing. On Friday, May 6, the price of the cryptocurrency surpassed $80.

The US dollar to UST parity model is predominantly based on arbitrageurs. If the price of a stablecoin drops below $1, traders can buy it and make a profit by exchanging it for $1 on LUNA.

1/ To help others understand $UST Why arbitrage and latch don’t come back right away…
There are some parameters that determine the spread during minting and burning. $UST / $LUNA. The more mint/burn in a day, the higher the spread. #terraluna

— My Life at Defi (@MyLifeInDefi) May 9, 2022

However, in order for this mechanism to work, the demand for the target asset must be met. In the UST example, the platform providing this demand is Anchor, the largest protocol in the Terra ecosystem. Second, it pays more than 19% per year for a deposit at UST.

According to SmartStake, users have withdrawn more than 3.3 billion USTs from the protocol on May 9. For less than a day on May 10, fund outflow reached UST 1.1 billion.

Users withdrew their money as the deposit interest dropped to 17.87%. On May 8, this resulted in a short-lived loss of the UST constant against the US dollar. But already on May 9, the indicator returned to 20% – against the background of the outflow of funds from Anchor, it became easier to pay a higher percentage.

At the same time, the protocol’s yield reserve continues to shrink. At the time of writing, there are less than 180 million USTs in the pool.

In March 2022, UST added another resilience mechanism, the Luna Foundation Guard (LFG) bitcoin reserve fund. It should promptly provide the BTC-denominated liquidity necessary to maintain the asset’s price. Already in May, the volume of assets under the management of the structure reached 80,394 BTC.

Aztec head of project growth, Jonathan Wu, noted that the decision to raise funds was made after the incident on the Abracadabra Money platform. Second, it allowed the UST to be used to issue Magic Internet Money (MIM) with a margin rate of up to 90%.

The story there?

1) Get the Bitcoin gang on board (every cycle needs a crazy billionaire to be tough for the King)

2) Atonement $UST -> $BTC offramp in addition to existing $UST -> $LUNA one.https://t.co/hCI9I60TXt

– jonwu.eth (@jonwu_) May 9, 2022

In January 2022, a scandal erupted around the Wonderland DeFi project, with which Daniele Sestagalli, the founder of Abracadabra Money, is associated. The event led to a drop in the value of the LUNA (cryptocurrency prices fell 21% over the week) and the temporary loss of the UST’s peg against the US dollar.

Following the events of May 9, LFG announced that it will provide a $1.5 billion loan to OTC traders to ensure the sustainability of TerraUSD. Funding was allocated through the sale of BTC-denominated reserves.

Shortly after, the organization released its new bitcoin address and noted that it will continue to provide loans to market makers.

Below is the new LFG $BTC wallet address: https://t.co/9t0NX3VEMI

The last clip shot by LFG was ~37K BTC. Similar to the last distribution, it was loaned to MMs.

Little of the last clip was spent but is currently used for purchase $UST.

Updates are coming.

— LFG | Guardian of the Luna Foundation (@LFG_org) May 9, 2022

On-chain data shows LFG’s wallet is empty. According to the organization’s dashboard, ~$197 million in assets remained in the reserve fund – the lion’s share of the funds falling to LUNA, UST and AVAX.

In a conversation with CoinDesk, LFG Governing Council member Jose María Macedo emphasized that there will be sufficient reserve funds to restore a stable UST price. However, critics of the organization believe that the organization has only “bought one more day”.

LFG, which uses market makers to stabilize the UST, is fine. They would turn their treasures into money one way or another. It buys them some time, but too little, too late. Optimistically it will save them a week. Pessimistically, less than a day.

— Galois Capital (@Galois_Capital) May 9, 2022

Block analyst Larry Cermak pointed to rumors that Jump Crypto, Alameda Research and other organizations that support the Terra ecosystem are dedicating an additional $2 billion to “save the UST.” According to him, the only way to save an asset is to secure it completely.

Personally, I think the only way to salvage it now is to fully (or potentially very close to complete) collateral. Otherwise I don’t see it used again

— Larry Cermak (@lawmaster) 10 May 2022

Terraform Labs president Do Kwon stressed that LFG has no plans to “give up their positions in bitcoin.” He explained that the transfer of capital to market makers would provide liquidity to stabilize the IHR.

2/ First, *LFG is not trying to exit the bitcoin position*.

The aim is to obtain this capital in the hands of a professional market maker by:

1) Buy UST if price < fixed
2) Buy BTC if price >= stable

thereby significantly increasing the liquidity around the UST fixation

— Do Kwon (@stablekwon) May 9, 2022

Jonathan Wu further suggested that trading companies “are prepared to do everything to prevent the death spiral of the UST”. According to him, the outcome of the situation will depend on whether the pressure from market makers exceeds sales from retail traders.

What’s next?

Friendly market makers start working to distribute a piece. $BTC buy from the market $UST and hold the latch up.

Hope is more (falling knife) $BTC More collateral in LFG than bank pressure from fraudsters $UST.

– jonwu.eth (@jonwu_) May 9, 2022

Popular analyst Hasu noted that Terraform Labs and LFG have a different possible strategy.

I hate to tip the ponzi but I would just let the latch break, not burn the treasure trying to support it. Wait until UST <> provides treasury parity, then regenerate as a collateralized stablecoin

— Hasu (@hasufl) May 9, 2022

“I don’t want to tip Ponzi but I would let the latch collapse instead of burning the treasury while trying to save him. Wait for the UST supply to reach Treasury par and then repurchase the asset as a backed stablecoin,” he wrote.

Meanwhile, Terraform Labs said skeptics exaggerated the importance of what was going on. The company stressed that UST is providing activity within the Terra ecosystem and arbitrageurs need time to stabilize the asset.

2/ UST MCAP > LUNA – No death spiral.
https://t.co/ZjaaESPytt

— Terra (UST) Powered by LUNA (@terra_money) May 9, 2022

Some believe that whatever the outcome, the event will have serious ramifications for the cryptocurrency market. Blogger Dennis Porter noted that regulators will use the collapse of the UST as the main argument in favor of aggregate regulation of stablecoins.

Mark my words. The UST failure will be used by policymakers as evidence to regulate stablecoins to death and support CBDCs.

This is not good.

— Dennis Porter (@Dennis_Porter_) 10 May 2022

Recall that in a recent ForkLog special, he described how Anchor problems could crash the Terra economy and cryptocurrency market.