As crypto markets continue to slide in value, concerns about the algorithmic stablecoin terrausd (UST) losing its $1 parity have swelled in recent times. Two days ago on May 7, 2022, UST dipped down to $0.985 per unit against tether (USDT), and the stablecoin’s price drop invoked a great deal of speculation concerning UST losing its dollar peg. Following the drop on Saturday, the Luna Foundation Guard (LFG) revealed it was lending out millions of dollars worth of bitcoin and UST in order to protect the peg until market conditions normalize.
Digital currency markets have suffered a great deal in recent times as billions of dollars have left the crypto economy during the last few weeks. Of course, crypto market mayhem typically pushes traders toward leveraging stablecoins in order to hedge their wealth from volatile market conditions. During the last few days, BTC has dropped from $40,000 per unit on May 4, to a low of $32,637 per coin on May 9. The entire crypto economy has followed BTC’s freefall and the entire lot of 13,432 tokens in existence is down 5.5% against the U.S. dollar.
This has fueled trade volumes for tether (USDT), usd coin (USDC), and many other stablecoins including UST. However, UST had dropped in value on May 7, slipping to $0.985 per unit against tether (USDT). While this is not the biggest deal and many other stablecoins have slipped below the $1 parity, the topic of Terra’s stablecoin has been trending on social media and forums over the past two days. Furthermore, a significant amount of UST was withdrawn from Anchor Protocol and Curve Finance.
A few Terra supporters called the incident a “coordinated attack” and said the UST dumps were “deliberate.” On Sunday morning, one Terra supporter wrote: “We are again seeing a coordinated attack on UST. $285m UST dump on Curve and Binance by a single player followed by massive shorts on LUNA and hundreds of Twitter posts. So far, not a really successful attempt as the peg is almost back at 1 dollar.” At the time of writing, UST is the tenth-largest crypto asset in terms of market valuation and is changing hands for $0.995077 per unit.
After all the speculation, rumors, and conspiracy theories, on May 9, 2022, the Luna Foundation Guard (LFG) and Terra’s co-founder Do Kwon explained the team was taking steps to ensure the peg remains defended. “Over the past several days, market volatility across crypto assets has been significant,” LFG said on Monday. “The market turmoil is also reflected by the past week’s uncertain macro conditions across legacy asset classes.” LFG says that it is mandated to “proactively defend the stability of the UST peg [and] the broader Terra economy.”
LFG has decided to lend out bitcoin (BTC) and the stablecoin UST in order to protect the stability of UST’s $1 parity. “The LFG Council has voted to execute the following: – Loan $750M worth of BTC to [over-the-counter] trading firms to help protect the UST peg. – Loan 750M UST to accumulate BTC as market conditions normalize,” the organization said on Monday. Terra’s co-founder, Do Kwon, further updated the public about the lending action. Kwon stressed that “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 purposes; “Buy UST if price [is less than] peg” and “Buy BTC if price [is greater than or equal to] peg,” Kwon said, “thus significantly strengthening the liquidity around UST peg.” The Terra co-founder added:
While buys and sells of UST are not meaningfully directional now, we felt it was valuable to have capital ready to be deployed in the current market. As markets recover, we plan to have the loan redeemed to us in BTC, increasing the size of our total reserves.
Essentially, LFG’s professional market makers will leverage the capital to protect both sides of the market to defend UST’s $1 parity. The recent discussions revolving around UST’s peg follow LFG buying up massive amounts of bitcoin (BTC) to keep in its decentralized forex reserve. LFG also acquired $100 million in AVAX for the same purpose. While LFG’s BTC wallet holds 42,530.82 bitcoin, it has not sent any funds. However, LFG recently acquired 37,863 bitcoin from two over-the-counter deals. With no withdrawals stemming from the publicly known BTC address, LFG has likely leveraged the most recent purchase to lend to the market makers.
What do you think about Terra’s co-founder and LFG deciding to lend BTC and UST to market makers so they can defend the stablecoin’s $1 parity? Let us know what you think about this subject in the comments section below.