(Bloomberg) – The closely watched stablecoin TerraUSD is backed by its backers after losing its peg to the dollar over the weekend.
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TerraUSD, or UST, once again fell well below the crucial $1 level on Monday, trading as low as 88 cents on crypto exchange Binance. The declines prompted backers led by Do Kwon, the founder of Terraform Labs — which powers the Terra blockchain — to issue $1.5 billion in UST and Bitcoin-denominated loans to help back the digital currency.
Stablecoins are meant to maintain a link to the value of currencies like the US dollar, and traditional forms of these tokens are backed by assets like cash or cash equivalents. But UST is an algorithmic stablecoin that lacks such asset backing, instead relying on trading and cash management to maintain its value.
Kwon and his team at Luna Foundation Guard, the nonprofit created to support the decentralized token and blockchain Terra, pledged earlier this year to buy up to $10 billion in Bitcoin to support the stablecoin.
“We are carefully monitoring market developments over the next 24 hours,” Steven Goulden, senior research analyst at crypto market maker Cumberland DRW, said in an email. “Including whether the mechanisms introduced to help increase dependency, such as LFG lending Bitcoin to OTC firms, will be enough to hold up in times of deep stress or whether we need additional stabilization mechanisms.”
Stablecoins are still primarily used by speculators, often as a place to park their money to avoid wild swings in crypto markets instead of regular dollars. Traditional dollars generally only enter and exit the crypto universe through exchanges, which follow the same “know your customer” rules as banks and brokerages. Stablecoins can be used in various DeFi platforms that provide users with anonymity, as well as advanced – and risky – ways to speculate on more crypto.
Unlike the centralized USD Coin or Tether stablecoins which are backed by real-world dollar-denominated reserve assets, TerraUSD maintains its peg largely by another volatile cryptocurrency, LUNA, through the programming of algorithms on the blockchain. Earth. To oversimplify, for every TerraUSD created, approximately $1 of LUNA is taken out of circulation and vice versa.
The unpeg was likely triggered by TerraUSD withdrawals from decentralized projects Curve Finance and Anchor, according to blockchain data and crypto market participants.
Data from blockchain data tracker Nansen shows that over 121 million TerraUSD tokens were withdrawn from decentralized exchange Curve Finance over the weekend. Curve Finance essentially allows users to provide liquidity to different “pools” with different tokens, while using a mechanism called an automated market maker that helps determine the price of a token when people trade crypto in each pool. At the same time, total TerraUSD deposits on Anchor, a lending project on the Terra blockchain, fell to $11.8 billion from $14.1 billion.
Kwon said on Twitter that Terraform Labs originally withdrew $150 million of TerraUSD from Curve to prepare for a new liquidity pool to go live this week and returned $100 million of TerraUSD after TerraUSD was pulled. Some sightings pointed to a mystery wallet that sent around $84 million from TerraUSD to Ethereum and cashed in USD Coin through Curve. Kwon said on Twitter that the wallet does not belong to Terraform Labs. He did not immediately respond to a request for comment.
Following TerraUSD’s large pullback, LUNA prices also fell over the weekend. LUNA is trading at around $58.48, according to CoinGecko, down around 11% in the past 24 hours. Many traders redeemed LUNA from the retired TerraUSD, leaving more LUNA tokens to sell on exchanges. Data from derivatives data provider Coinglass shows Binance traders began shorting LUNA heavily on Saturday.
“The weekend’s UST event looked, felt and played out like an attempt to manipulate the UST lower into the back of the Curve 4pool coming online,” said John Kramer, trading director at crypto market maker GSR. “LUNA carried the brunt of the offense as participants will hit LUNA with their UST.”
Terra has capital controls to prevent too many TerraUSD from being taken out of circulation so they can be exchanged for LUNA, according to Ryan Watkins, co-founder of crypto hedge fund Pangea. As a result, the majority of TerraUSD dumping takes place on Curve Finance and other exchanges. Curve Finance’s Michael Egorov said there was “massive” TerraUSD trading activity at Curve.
It was unclear how LFG’s vote to use $750 million in Bitcoin from the reserve and $750 million in TerraUSD would help maintain the peg. Kwon noted in his tweets that LFG is not trying to “exit” its Bitcoin position.
“As the markets recover, we plan to repay the loan to ourselves in BTC, thereby increasing the size of our total reserves,” he tweeted.
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(Updates UST price in second paragraph.)
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