The Terra network’s native token LUNA has dropped roughly 10% to $60 on fears that Terra’s stablecoin UST, which is largely supported by LUNA, would lose its peg.
UST hit a low of $0.985, and it is now trading at $0.99. Although a 1% de-peg from $1 is common for stablecoins during times of high market pressure, it is quickly recovered but it’s been more than 24 hours in the case of UST.
A number of large withdrawals from Anchor Protocol, a lending market that provides high rates to users who deposit UST, appeared to trigger off the de-pegging. Anchor’s total UST deposits declined from $14 billion to $11.2 billion during the weekend.
Also on the Curve platform, large amounts of UST were also removed from liquidity pools. Terraform Labs, the company that created Terra, even took a $150 million cash withdrawal.
Do Kwon, the CEO of Terraform Labs, tweeted they withdrew $150M on Sunday as they prepared to transfer funds across pools, but then re-deposited $100M after noticing UST had begun to trade at a discount to other stablecoins.
UST’s stability is maintained by traders swapping LUNA for UST. The system is set up so that 1 UST can be traded for 1 dollar worth LUNA at any moment.
Hedgers pounced in when UST fell below its $1 peg and swapped LUNA for the reduced UST, benefiting from it. The Terra protocol removes UST from circulation each time traders buy UST and swap it for LUNA, which helps maintain UST’s peg to USD.
However, because of the sell pressure on Terra, its price may fall in an attempt to save its founding network’s stablecoin.
Furthermore, traders who take advantage of UST’s stability mechanism by selling LUNA for UST destabilize the peg by selling huge sums of UST for other stablecoins like USDC, reintroducing disruptive sell pressure on UST.
A single wallet raised suspicions for dumping $85M worth of UST on Curve and $108 million on Binance, giving a touch of conspiracy to the events. Within the Terra community, this has led to accusations that the depeg was an organized attack.
On Saturday, Do Kwon jumped in with a series of comments and barbs at the people who were spreading ‘FUD’.
A single wallet seemed set on salvaging UST’s peg when Kwon began tweeting the wallet exchanged approximately $200 million in UST for Tether in less than 10 minutes in order to rebalance UST’s Curve pools and raise its price.
Following the events, the LFG Council has decided to carry out the following actions. The first was a $750M BTC loan to OTC trading firms to assist protect the US dollar’s peg. Then, as market conditions recover, lending 750M UST to accumulate BTC.
The traders will trade capital on both sides of the market to help achieve both of the steps, with the LFG Reserve pool which is priced in bitcoin eventually preserving parity when market circumstances calm.
Recently, the Luna Foundation Guard hit headlines when they purchased an additional 37,863 Bitcoins worth $1.5B bringing their total Bitcoin stash worth upto $3.5B. This purchase makes it one of the top ten bitcoin holders in the world.
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