An algorithmic stable coin, that aims to function stable coins such as tether, which track the price of U.S. Dollar, but without any cash held in a reserve to back it. UST Crypto was developed by Singapore-based Terraform Labs.
What’s the issue of UST? Let’s find out!
UST cryptocurrency is struggling to maintain its $1 peg. The depegging has resulted in a shock for the investors holding UST as it lost its value resulting in the decrease of the value of the assets they possess. The UST rate fell to as low as $0.9956. This phenomenon prompted investors to trade Luna for discounted UST, resulting in gains and take on the downward trend of UST.
How did Terra come into the scene?
The Luna Foundation Guard, an organization created by Terra’s investor, Do Kwon, helped the investors to trade in Luna to help them restore the faith in the market. Du kwon, assured that Terra would lend $750 million in bitcoin to hold UST’s price peg.
It is also true that, Do kwon, issued an estimate of $1.5 billion in loans in both UST and Bitcoin to help support the digital currency.
Now we have an idea that Terra is willing to facilitate UST to restore back. But, why did Terra select bitcoin? The idea behind the logic is that bitcoin will most probably act as the reserve currency for the Terra Ecosystem, similar to how central banks have dollars in their foreign exchange reserve.
How would the investment in bitcoin help stabilize the UST Crisis?
The investment in Bitcoin, according to De Kwon, is part of a plan to someday allow UST holders to redeem their tokens for bitcoins. Bitcoin will take up the job that Luna previously held. The ideal scenario would be for UST investors to purchase bitcoins at a discounted rate. However, he stated that this proposal is still far from being implemented.
What are the major risks of the loan by Terra?
The most important factor to be considered in the above plan of action is the implementation of plan. Even if the plan is implemented to the T, there are no guaranteed results. The most significant danger going forward is further depegging of UST, which would force LFG to liquidate its bitcoin holdings. If the above scenario were to come true, that would cause a catastrophic outcome in UST’s history.