How did Terra Coins Worth $60 Billion Disappear?

Thursday May 26, 2022

LendenX

A cryptocurrency category called stablecoins has been attempting to recreate reliability in completely different ways. TerraUSD is often referred to as UST and its sister cryptocurrency Luna; their respective market value was falling to the lower level of $60 billion they once had. This plunge has caused concerns that extend beyond its small portion of the stablecoin market.

TerraUSD’s Model

TerraUSD was tied to the token Luna where the price was determined according to the marketplace. Since one UST could be defined as equivalent to the value of $1 in Luna which meant that even though Luna’s value for UST will differ, the holder of one dollar in UST will always receive the value of $1 in return. This created arbitrage rewards for traders, which were created to maintain values of UST close to $1.

Critic’s point of view

Some considered UST as a brand new type of Ponzi scam. Others were more polite and stated that Terra’s business model contained a weakness at its root – the peg of UST to Luna. They could only maintain their value when more people purchased them. Between April’s close and Luna’s collapse, Anchor burned nearly $100 million worth of UST in its reserves to meet the increasing demand for high yields.

What Happened?

It is unclear what caused the initial decline in the demand for UST, however, Anchor had cut its yields by 20 percent to 18 percent on May 2nd. Within a couple of days, the majority of UST was removed from Curve Finance, a decentralized exchange. Kwon announced on Twitter that his company Terraform Labs had withdrawn $150 million UST from Curve to make way for a brand new “liquidity pool” which would be launched on the exchange. However, around simultaneously, a whale swapped around $84million worth of UST for a currency known as the USD Coin, through the exchange.

How does the value go down even further?

These large-scale moves, coming after the cut in interest rates, caused more UST depositors to cash out their stablecoins out of Anchor and a flood of transactions that wiped UST off its $1 peg. The crypto equivalent of a bank has led to an increase in UST holders transferring their funds. However, one of the primary ways to withdraw from UST was via Luna which was already losing value because of the loss of confidence in investors and the general downturn in the market which only exacerbated the situation. The exchange mechanism between UST and Luna was that the huge UST withdrawals caused an enormous increase in the amount of Luna and reduced its value by a significant amount.

Terra’s Reserve

According to LFG’s tweets, the company spent nearly all the Bitcoin reserves trying to keep UST’s peg intact through various trading strategies, including selling Bitcoin for UST. On May 16 the reserve was down from a high of 80,000 Bitcoin to 313. The day after, Kwon gave up on keeping the stablecoin, but he proposed conserving its Terra blockchain in a brand new entity, which would use Luna tokens.

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