UST, the third-largest stablecoin by market capitalization, is crashing fast after it depegged from the US dollar following the crypto market drop. Terra stablecoin’s price dip continues despite support from the Luna Foundation Guard for a $1.5 billion loan to keep the currency afloat.
The UST stands on its own as it’s designed to hold 1:1 parity with the US dollar through its algorithmic relationship with Terra’s native token LUNA. It should be noted that other stablecoins, such as Tether and USDC are backed by cash and assets in the bank. According to Terra, minting LUNA requires burning UST, and minting UST require burning LUNA. This keeps UST as close to UST as possible.
Experts believe that UST de-pegging to $0.99 is nothing to worry about as traders can buy it at a discount and sell it at $1.00 – with orders being theoretically restored because the free market does all the work. However, the Luna Foundation Guard is not so sure whether this will work. One of the reasons is the crypto market crash that is now for the fifth consecutive day, resulting in the overall market losing $0.4 trillion from $1.8 trillion to $1.4 trillion.
The Luna Foundation Guard on May 3 stockpiled nearly $4 billion worth of Bitcoin, Avalanche, LUNA, and UST for its reserves. It hoped to fall back on its reserves in case UST’s algorithm stopped working. When the UST slipped to $0.98 over the weekend, the Foundation decided to lend out $750 million in Bitcoin and $750 million in UST. This was an effort to defend the stability of the stablecoin’s peg and the broader Terra economy. The crypto market has been under volatility amid the uncertainty of macro conditions in legacy markets.
With UST slipping further, Terra co-founder Do Kwon tweeted that the network has deployed more capital – steady lads. At the time of writing this article, UST had lost 10% in the last 24-hours with its price standing at $0.89.