Not a good look for stablecoins: UST loses its peg

Terra native stablecoin UST has lost its peg to USD. At one point last night, UST was trading as low as 60 cents on the dollar at FTX Cryptocurrency and Derivatives exchanges, causing UST stakers on Anchor protocol to feel the heat. Anchor was paying 18.5% APR for UST depositors for several months, a yield rarely found in DeFi, not even considering traditional finance. It almost seemed too good to be true.

Binance, the largest cryptocurrency exchange, even restricted selling below $0.70 and stopped API access to place bids in the orderbook, a highly manipulative ‘damage-control’ activity for the industry’s leading centralized exchange.

Since yesterday’s lows, the price has somewhat recovered and is sitting at 0.8950 USD right now, however, UST is still looking to regain the peg fully.

Primarily, UST was backed by Luna, the governance token behind Terra. As long as LUNA price and market cap. kept growing, there was enough collateral in the system to back reserves and artificially support yield capabilities on Anchor protocol. We already discussed the sensitive and potentially dangerous LUNA-UST relationship a month ago in a separate post a few weeks ago.

To strengthen and diversify collateral reserves, Terra has been on a tear buying BTC and has amassed a war chest of more than 70,000 BTC worth close to $3B (at the time), an activity cheered by market peers (due to the creation of buying pressure on BTC). The whole mechanic looked like a solid business case until the game of musical chairs lasted.

When the whole crypto market started experiencing a slowdown, along came Luna. With a severely reduced market cap. of LUNA, the UST liability threshold shot up. And then the self-reinforcing panic loop started the bank run. UST holders started exiting positions, exchanging Terra-native stablecoin to other equivalents (USDT / USDC / DAI). The balance of a UST+3crv pool in Curve.fi got severely skewed towards a predominantly UST-filled pool.

Meanwhile, Anchor Protocol lost over 55% (from 14B to 6.5B tokens) of deposits in a few days yet still hosts more than 6 billion UST coins and is paying out >19% rewards for stakers. Whether these are Terra-owned UST, reserves of believers or slow-reacting entities it is still unknown.

There is speculation in the market that Terra had to deploy its BTC reserves to try and restore the peg as their reserve wallet has been emptied. Chain analysis indicates that at least 8,000 BTC went to a cryptocurrency exchange OKEX.

Whether the Terra (Luna) team will be able to recover the peg, it’s still unclear, but one could say that the reputational damage has been done. Luna has lost about 2/3 of its value in 4 days, and there is virtually no demand for UST anymore.

It’s?a good lesson to remember when dealing with stablecoins - one must fully understand the nature, structure, and collateral mechanisms behind different stablecoins to be confident enough to use them.?

During the same period, 1 USD peg of USDC/USDT/DAI did not go below 0.997.?

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For more information about different stablecoin mechanisms, their features, benefits and infrastructure implications - see the recording from MEV Capital's last DeFi-oriented event (hosted on April 7th).