As cryptocurrency markets continue to decline in price, concerns have recently increased that the algorithmic stablecoin terrausd (UST) will lose $1 parity. Two days ago, on May 7, 2022, UST dropped to $0.985 per unit against tether (USDT), and the stablecoin price drop has caused much speculation about UST losing its peg to the dollar. After the price drop on Saturday, the Luna Foundation Guard (LFG) announced that it was lending millions of dollars in bitcoin and UST to protect the peg until market conditions normalize.
Cryptocurrency market massacre undermines UST’s algorithmic stablcoin peg, Terra supporters claim that stablcoin was the victim of a “coordinated attack”
The digital currency markets have been hit hard lately, as billions of dollars have left the crypto economy in the past few weeks. Of course, the mayhem in the cryptocurrency market usually pushes traders to use leverage in stable coins to insure their fortunes against unstable market conditions. Over the past few days, BTC has fallen from $40,000 per unit on May 4 to a low of $32,637 per coin on May 9. The entire crypto-economy followed BTC‘s free fall, and the entire batch of 13,432 existing tokens fell 5.5% against the U.S. dollar.
This spurred trading volumes in tether (USDT), usd coin (USDC) and many other staplecoins, including UST. However, on May 7, UST dropped to $0.985 per unit against tether (USDT). While this is not the biggest deal, and many other stabelcoins have fallen below $1 parity, the Terra stabelcoin topic has been trending on social media and forums for the past two days. In addition, a significant amount of UST has been withdrawn from Anchor Protocol and Curve Finance.
Several Terra supporters called the incident a “coordinated attack” and said the UST drain was “deliberate.” On Sunday morning, one Terra supporter wrote: “We are again seeing a coordinated attack on the UST. A $285 million UST dump on Curve and Binance by one player, followed by massive shorts on LUNA and hundreds of messages on Twitter. So far, the attempt has not been very successful, as the peg is almost back to $1.” As of this writing, UST is the tenth largest crypto-asset by market valuation and is trading at $0.995077 per unit.
Luna Foundation Guard Reveals Lending of $1.5 Billion in Crypto Assets to Defend UST’s Peg
After all the speculation, rumors and conspiracy theories, on May 9, 2022, Luna Foundation Guard (LFG) and Terra co-founder Do Kwon explained that the team is taking steps to ensure the peg is protected. “The volatility in the crypto-asset market has been significant over the past few days,” LFG said Monday“The market turmoil also reflects the uncertain macro conditions of the past week in all legacy asset classes.” LFG says it is responsible for “actively protecting the stability of the UST peg [and] the broader Terra economy.”
LFG has decided to make loans to bitcoin (BTC) and the UST Stablecoin to protect the stability of the UST $1 parity. “The LFG Board voted to do the following: – Provide $750M in BTC credit to [OTC] trading firms to help protect the UST peg. – Provide $750M UST to accumulate BTC as market conditions normalize,” the organization said Monday. Terra’s co-founder, Do Kwon, additionally informed the public about the lending action. Kwon stressedthat “LGF is not trying to exit its bitcoin position.” Kwon added that the main goal is to have capital in the hands of professional market makers.
The liquidity provided has two goals: “Buy UST if the price [is] less than the peg” and “Buy BTC, if the price [is greater than or equal to] the peg,” Kwon said, “thereby greatly enhancing the liquidity around the UST peg.” The Terra co-founder added:
While UST purchases and sales are not meaningfully directional right now, we have found it valuable to have capital ready to be placed in the current market. When markets recover, we plan to repay the loan in BTC, increasing the size of our total reserves.
In essence, professional LFG market makers will use capital to protect both sides of the market to defend UST parity at $1.The recent discussions around UST pegging followed LFG buying up huge amounts of bitcoin (BTC) to hold in its decentralized currency reserve. LFG purchased $100 million in AVAX for the same purpose. While BTC LFG has 42,530.82 bitcoins in its wallet, it has not sent any funds. However, LFG recently acquired 37,863 bitcoins through two over-the-counter transactions. Since no funds were withdrawn from the publicly known BTC address, LFG probably took advantage of the fact that its address was not known. BTC address, LFG likely used the last purchase to credit market makers.
What do you think about Terra and LFG’s co-founder’s decision to lend BTC and UST to market makers so they could protect the $1 stable currency parity. Let us know what you think about this in the comments section below.
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