Terra Taps Into BTC Reserves To Combat Peg Loss

Terra Taps Into Btc Reserves To Combat Peg Loss
Terra Taps Into Btc Reserves To Combat Peg Loss

The Luna Foundation Guard has announced that they will proactively work on restoring the TerraUSD (UST) peg.

TerraUSD dips below 0.70 USD

The leading algorithmic stablecoin began to lose its peg yesterday afternoon. This de-pegging event was predated by a wave of FUD, which started spreading after a whale dumped 285 million UST on the market. At the time of writing, CoinMarketCap reports an aggregated trading price of 0.79 USD after rebounding slightly from a price dip to 0.69 USD.

Terra Taps Into Btc Reserves To Combat Peg Loss
24-hour price chart of TerraUSD. Source: CoinMarketCap.

As an effort to stabilize the peg again, the Luna Foundation Guard has loaned out 750 million USD in Bitcoin from their reserves to professional market makers. An additional loan of 750 million was set aside in order to recapitalize the foundation’s Bitcoin assets. On their Twitter channel, the foundation commented:

The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize.

UST “undercollateralized”?

LUNA is the utility token used by all Terra stablecoins to absorb the price fluctuation and allow all stablecoins under the Terra ecosystem to algorithmically expand and contract their supply. The continuing UST sell-off caused the price of LUNA to crash by more than 44% daily. 

As a result, UST now has a market cap of around 14.2 billion USD, while the LUNA market cap stands at only 12.6 billion USD. It is, however, a misconception to say that UST is undercollateralized, since it is not “backed” by LUNA. Rather, arbitrage traders back the stablecoin, as they can mint more LUNA tokens by returning any oversold UST. 

This means that the UST price will eventually return to its peg, as long as LUNA has a trading price. Historically, Terra has been holding its peg with relatively high stability, compared to other algorithmic stablecoins.

Terra Taps Into Btc Reserves To Combat Peg Loss
All-time price chart of TerraUSD. Source: CoinMarketCap.

There are only two notable de-pegging events. The first one occurred in December 2020 and was resolved within 48 hours. In the second de-pegging event, the UST price took about a week to restore its peg.

More trouble for algorithmic stablecoins

TerraUSD has become the latest algorithmic stablecoin to come under pressure recently. Turmoil in the stablecoin markets started in April with Neutrino USD, likely as a result of market manipulation. While regaining most of its losses, USDN has not fully recovered yet.

Later that month, Beanstalk was hacked and had 76 million USD in liquidity drained by the attacker. Most recently, Beanstalk stakers have approved an emergency fundraiser to recoup the funds lost in the hack, but the BEAN stablecoin will likely head for a redeployment of its token contract.