LUNA eclipse πππ
TL;DR UST stablecoin formerly 3rd by market cap lost its peg and dropped from its intended $1 peg as low as $0.225 on 11th of May together with dreams and hopes of thousands of users.
π What happened
UST (TerraUSD) was one of the most prominent decentralized and algorithmic stablecoins on the Terra blockchain. Unlike centralized stablecoins USD Coin or Tether that are backed by real-world, dollar-denominated reserve assets, TerraUSD maintains its peg largely by another volatile cryptocurrency, LUNA, through algorithms programming on the Terra blockchain. To oversimplify this, for every UST created, about $1 of LUNA is taken out of the circulation and vice versa.
TerraUSD was created to deliver value to the Terra community and offer a scalable solution for DeFi amid severe scalability problems faced by other stablecoin leaders like Dai. Thus, TerraUSD promised users a higher level of scalability, interest rate accuracy, and interchain usage.
But ambitions of "DAI killer" may not cost a dime soon.
Signs of a catastrophe appeared amidst an increasingly bearish market, with 20% of UST deposits withdrawals from Anchor Protocol and additional large withdrawals from Curve and other single accounts' sell off over the weekend (7-8th of May).
All these events led to a short UST price decline from $0.9998 to $0.9857 with the following bounce back. But as long as LUNAβs market cap stayed above that of UST with LUNA's price higher than $70, everything seemed to be under control.
Read more on what happened:
The Luna Foundation Guard (LFG) response and the results
π Measure 1
Early on May 9th the LFG came up with a plan "to prepare for potential future volatility" that could be summed up shorty as follows:
to loan $1.5B 50%/50% in BTC/UST to market makers to help stabilize the peg
The result was far from expected:
UST price began to drop, falling as low as $0.6065, and panic exacerbated when UST and LUNA market caps flipped.
Most of 10th of May UST spent around its new βpegβ of $0.91, while LUNA lost almost 50% of its price and dropped lower than $30.
π Measure 2
As downwards price pressure were not going anywhere, on 11th of May the LFG decided to mint even more LUNA in an attempt to stop the downwards spiral of UST.
However, on 11th of May the price of LUNA felt as low as $0.4761, but the peg was not restored and UST dropped again and this time much lower - to $0.225 and re-bounced only to $0.6915 at the time of writing at the end of 11th of May.
By then, LUNA market cap was just about 16% of UST market cap, leaving UST significantly deviating from its intended peg at $1.
π Open questions
- Was it a bad execution of the LFG and/or their market maker partners?
- Or was the money spent to short LUNA under the hood of a dropping market instead of rescuing it?
Anyway the worst nightmare is happening in front of our eyes and the real impact of this story on crypto investors, project and the whole industry is yet to be seen.
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