After plummeting below the carefully watched milestone earlier this week, the bitcoin price had slipped back below $30,000 per bitcoin. BNB, Solana, Cardano, and Avalanche(Ethereum’s main competitors) have all fallen. With 10 percent and 20 percent declines, Solana and avalanche are driving the big market lower.
Terra’s luna, a cryptocurrency created to underpin the UST dollar-to-dollar peg, has lost nearly 90% of its value in the previous week as traders dumped the cryptocurrency.
Given macro events (monetary tightening policy, rising inflation, Russia’s war on Ukraine), crypto markets are still under pressure, and the link between bitcoin with global equities is significant, as per Jaime Baeza, CEO of Miami-based crypto hedge fund ANB Investments. He added that the most recent fall in crypto prices is because of the de-peg of UST.
Last week, the market capitalization of UST, the largest algorithmic stablecoin by market value, was over $18 billion. On Saturday, it began to lose its peg to the dollar, and on Monday, it traded as low as 60 cents. It has dropped to roughly 22 cents this morning!
The Luna Foundation Guard, an organization formed to maintain the UST dollar peg, has said it will sell its $3 billion in bitcoin reserves to defend its pricing.
As panic spread, the larger crypto market sold off even faster, and a black swan systemic-risk catastrophe drew closer, as per Baeza.
Why was UST created?
UST was created so that merchants can exchange 1 UST for $1 worth of luna, regardless of the UST price. When the meltdown occurred, the Luna Foundation Guard accumulated a $10 billion bitcoin-based crypto reserve.
Do Kown, the founder of Terra Labs, UST, and Luna, has guaranteed that another bailout is on the way. Kwon stated he was “getting close” to “announcing a recovery plan for UST” on Tuesday, which helped the price surge, but it has since fallen again.
What are experts saying?
A leading trader, Alex Krüger, wrote on Twitter that with the [UST] peg gone, luna would default to zero (as arbitrageurs purchase UST and sell luna) until parity and confidence are rebuilt. This can only be done with a large capital infusion and protocol adjustments.
With the peg gone $LUNA will go to zero by design (as arbitrageurs buy UST & sell LUNA) unless parity and trust are restored, which can only be done by means of a significant cash infusion and changes in the protocol.
— Alex Krüger (@krugermacro) May 11, 2022
Last week, the UST began to lose its peg due to a broader asset meltdown that included bitcoin, cryptocurrencies, including luna, and stock markets. Some have hypothesized that a seller flooded the market with UST over the weekend to target the stablecoin.
Meanwhile, the luna-based decentralized financial lending application Anchor was drained out of $5 billion in UST during this turmoil.
Are any measures being taken to control this situation?
Earlier, we had reported that Luna Foundation would lend $1.5 billion worth of BTC & UST to protect the peg of UST. Binance, a leading crypto exchange, had halted the withdrawals of LUNA and USDT amind this frenzy.
Apart from that, Do Kwon, the creator of LUNA, took to Twitter to list new measures he intends to arrest this current turmoil. He said that the price stabilization system is consuming UST supply, but the expense of absorbing so many stablecoins at once has extended the on-chain swap gap to 40%. Hence Luna’s price has dropped considerably due to the arbs being absorbed.
1/ Dear Terra Community:
— Do Kwon 🌕 (@stablekwon) May 11, 2022
He added that before $UST can begin to re-peg, the only way forward is to absorb the stablecoin volume that wants to exit.
He supported the community proposal 1164, which would increase the base pool from 50 to 100 million SDR and decrease the PoolRecoveryBlock from 36 to 18 million SDR. This will boost minting capacity from $293 million to $1200 million. This should make it easier for the system to accept the UST.
With the present on-chain difference, peg pressure, and UST burn rate, the supply excess of UST (bad debt) should continue to shrink until parity is achieved and spreads begin to heal.
Naturally, this comes at a high cost to holders of UST and LUNA, KWON added. He said that he would continue looking for ways to bring more external money into the ecosystem and lower the provide of UST.
