One of the biggest things that took place in this correction was the 3rd largest stablecoin UST losing its dollar peg. The Luna Foundation Guard (LFG) has been trying desperately to defend the peg with its BTC reserves but the price is still at $0.871. It has recovered quite a lot as the stablecoin made a lot of nearly 65 cents. However, that’s not the worst part because as UST loses the dollar peg, the Luna token crashed 50% in a day. It is now trading near $30 after making a low of $23.
UST loses dollar peg
UST is a very unique stablecoin as it uses an algorithm to ensure that 1 UST is always equal to 1 USD. The mint and burn mechanism, helps users swap their UST for Luna which also helps absorbs any shocks to its price. In theory, this should work but yesterday was an example that it doesn’t. Plus, the fall of Luna’s price is also putting UST under pressure. If it falls too low, users won’t be able to swap 1 UST for $1 in Luna.
The first time UST lost its dollar peg was on Saturday when it fell to $0.985. It recovered after that on Sunday, however as billions of dollars were withdrawn from Anchor protocol and the markets tumbled so did UST.
Using Bitcoin to maintain the peg
LFG has been buying Bitcoins for a while to be able to maintain its dollar peg when needed. So, as the price of UST collapsed it has loaned out $1.5 Billion in BTC to market makers to defend the UST’s dollar peg. However, it seems that the price of UST will take a while to recover. While there is no direct link between Terra’s algo and LFG reserves, there are proposals to connect Bitcoin to their smart contracts. This could allow users to redeem UST and Luna for BTC directly.
The bigger deal is not UST losing its dollar peg, but its investors losing trust in the stablecoin. If market certainties affect a stablecoin when investors need to stay put then it won’t be able to last long in the market.
What are your thoughts as UST loses the dollar peg? And when do you think it will recover completely? Let us know in the comments below. Also, if you found our content informative, do like and share it with your friends.