Lesson Learn from Terra Labs Stablecoin $UST : How did depeging

A stablecoin is a cryptoasset pegged to an asset that has a stable price, such as a fiat currency or precious metal (gold, silver or etc). Stablecoins were developed to avoid the high levels of volatility common in the cryptocurrency market.

There are three types of stablecoin:

1. Fiat-backed (Dolar, Rupiah etc), Fiat-backed stablecoins, like USDT, BUSD, are pegged to traditional fiat currencies. They maintain a peg by keeping fiat reserves that can be exchanged for the stablecoin
2. Crypto-backed, Crypto-backed stablecoins (such as DAI) over-collateralize their tokens to factor in crypto price volatility,
3. Algorithmic, algorithmic stablecoins control supply without the need for reserves like UST, USDD, USN etc

TerraUSD ($UST)

In this case we'll dig deeper to TerraUSD (UST). TerraUSD (UST): Is a stablecoin pegged to the US dollar by use the Algorithmic Stablecoins and of course without any actual cash held in a reserve to back it. TerraUSD (UST) is fully algorithmic in the mechanism with $LUNA Market participants can mint UST by burning an equal amount of LUNA in dollars Vice versa, 1 UST coin can be burned for the dollar value in LUNA (Rate 1 UST = $1 LUNA).

The higher demand for UST, the more LUNA decreases in the supply. Moreover, using DApps built on LUNA ecosystem will require the users to pay the gas fee in $LUNA token (Supply decreases) + (demand to pay gas fee increases) = increase in price of $LUNA

To protect the wall defense of UST pegging to $1, $BTC is purchased and stored in the fund of LFG (Luna Foundation Guard). UST will not be backed by the BTC reserve. The reserve will act as a market participant that will swallow the supply contraction of UST.

When the UST peg drops below $0.98, LFG started to sell $BTC for the sake of buying back UST in order to bring the peg $1 back. the only way to mint more UST is still only by burning LUNA. You will not be able to mint UST via BTC since this is only a new mechanism to defend the peg

Algoritmic Stablecoin use cases

Positive Case

1. Peg 1:1 US Dollar, Achieve target
2. UST > 1 USD

Use luna as collateral to mint UST; when mint UST, the quantity increases, making the peg return 1:1. At the same time, the mechanism will burn the collateral Luna causing the supply of Luna to decrease and then increase in value.

Negative Case

1. : UST < 1 USD

Burn UST to reduce the quality, then peg back to 1:1 ( You can understand that the smaller quantity – the more value will increase, so the UST value will return to 1U), and when burning UST, a corresponding amount of Luna will be minted.?

This is an issue UST is facing?to save?UST, the consequence is that they will try to burn as much UST as possible to Peg return 1:1. However, doing so means that Luna’s supply continues to increase without limit. So no one knows where Luna’s bottom is; even project owner Terra Luna Ecosystem doesn’t know.

2. Terra is betting that use on their “network” of financial applications that utilize the stablecoins (and LUNA) will drive perpetual demand.

This assumption is not certainand Terra stablecoins have deviated from their peg in the past. In many ways, a developing DeFi financial ecosystem that is backed by an algorithmic stablecoin with no real collateral or government guarantee, but instead relying on perpetual interest of individually motivated market actors for sustainability, looks like standing dominos once the first falls, all of the others could be affected.

How did UST depeging

First on May 7

UST’s peg came under stress when an?$85 million swap from UST to USDC?in a?Curve?pool occurred . This shook the confidence of the pool’s liquidity providers, who began to withdraw some of their assets. come later $UST holders withdrew $3.8B $UST from Anchor, which caused $LUNA to drop 10%.

In response, on May 8

the?Luna Foundation Guard (LFG)?announced it is deploying $1.5 billion of its reserves. It said it will loan?$750 million of BTC?to market makers to be sold to defend UST’s peg, and another?$750 million of UST?to buy back BTC after the volatility subsided.

The algorithm, which is supposed to burn UST and mint LUNA when UST is below $1, hasn’t worked as well; it’s failed to keep up with the extreme conditions. According to?a proposal submitted by Kwon

On May 11,

The algorithm couldn’t facilitate the minting of new LUNAs at a speed needed to re-peg UST (it had to outrun the market speed, and it couldn’t), and so a proposed change in code would alter the mint cap and speed up the algorithmic process. The proposal, if passed, would see more LUNA minted in a shorter span of time.

Defending UST means sacrificing LUNA’s price since it increases LUNA’s supply, and greater supply means selling pressure on a token’s price. As a result, LUNA violently crashed during the night of May 11, falling more than 97%?