Bitcoin investors are in a state of panic as the controversial terraCD stablecoin goes beyond the supposed peg to $ 1.
TerraUSD, or UST, first fell below 70 cents late Monday as holders continued to run away from the token in what some described as a “bank run”. According to Coinbase, the token fell 62 cents before resuming trading at 90 cents on Tuesday.
Created by Singapore’s Terraform Labs in 2018, UST is what is known as an “algorithmic” stablecoin. Part of the Terra blockchain project, it is designed to track the value of the dollar, like other Tether and USDC stablecoins.
However, unlike these cryptocurrencies, Terra has no cash or other assets held in reserve to secure its token. Instead, it uses a complex mix of code – along with a cognate marker called luna – to stabilize prices.
UST is important to bitcoin investors because the Luna Foundation Guard, the organization that supports the Terra project, has billions of dollars in bitcoins that could potentially be thrown into the market at any time.
“Every professional crypto investor today is looking at the UST with one eye to see if it can maintain its peg to the dollar, “said Matt Hogan, investment director at Bitwise Asset Management.” There is clearly significant market risk. “
Simply put, the Terra protocol destroys and creates new UST and luna units to regulate supplies. If the price of UST falls below the dollar, it can be withdrawn from circulation and exchanged for a month, which makes UST supplies more scarce and raises its price – at least, so it should work in theory.
To further complicate the situation, Terra’s creator, Do Kwon, bought a $ 3.5 billion bitcoin to provide UST support during the crisis. The theory was that eventually UST could be redeemed for bitcoin instead of luna, but this is untested and not yet implemented in practice.
Deposits at Anchor, Terra’s flagship lending protocol, fell from 10.3 billion tokens on May 6 to just 6.4 billion on Tuesday, according to data from the Nansen blockchain think tank. Anchor has offered users nearly 20% of the annual return on their UST, a rate that many analysts find volatile.
On Monday, Luna Kwon Foundation security said it would lend $ 750 One million bitcoins will be traded by firms to “help protect the UST peg”, while another 750 million UST will be lent to buy bitcoins “as market conditions normalize”.
In a subsequent tweet, the organization said it had withdrawn 37,000 bitcoins – worth more than $ 1 billion in current prices – for the loan. “Very little” of the borrowed bitcoins has been spent, the Luna Foundation Guard said, but “it is currently being used to buy” UST.
Several crypto-investors are concerned that the Luna Foundation Guard could sell or sell much of its bitcoin to support UST – analysts have noted that the group’s bitcoin wallet is now completely empty.
Against this backdrop of uncertainty, the decline in UST has caused shock waves across the crypto market.
Bitcoin, the world’s largest digital currency, briefly fell below $ 30,000, reaching its lowest price since July 2021. As of 7:00 a.m. Eastern European time, bitcoin was trading at $ 31,324, down about 5% over the past 24 hours. It has now fallen more than 50% from its all-time high in November.
Over the past 24 hours, the price of Luna, similar to UST, has fallen by about half. The last time it was traded at $ 32.
In addition to the problems of UST Binance owners, the largest cryptocurrency exchange in terms of market size, temporarily suspended the withdrawal of both UST and luna “due to the large volume of expected withdrawal transactions”, citing network congestion.
Since then, Binance has resumed withdrawing funds and says it will “continue to monitor” network conditions.
“I think the market is expecting forced sales from Terra and the reserve,” Nick Carter, co-founder of Coin Metrics, told CNBC. “It’s trouble, but highly anticipated. No algorithmic stablecoin has ever succeeded, and this is no exception. ”
He added that the problem with UST is that it is largely “supported by faith”.
“It’s not fully guaranteed, it’s certainly not fully backed up by reserves,” he told CNBC. “It was really backed up by faith in the issuer.”
Terraform Labs did not respond to numerous requests for comment.