Terra USD (UST), the third-largest stablecoin by market capitalization, appears to be in catastrophic disarray as it decoupled from the U.S. dollar and fell to a low of $0.67 on May 10.
As its price fell, so did its market cap, as did Terra (LUNA), which underpins most of UST’s value. To make matters worse, UST’s market capitalization has greatly surpassed that of LUNA, which has come under intense scrutiny from the crypto community.
At the time of writing, UST is at $0.78 with a market cap of $14.1 billion, while LUNA has been in free fall, falling to $35.07. This led to a massive liquidation of leveraged positions, reducing the market cap to $12.3 billion, according to CoinGecko.
If the market cap of LUNA is lower than UST, the Terra project may not have sufficient funds to properly support the value of the algorithmic stablecoin and maintain its peg.
Is there a problem if the UST mcap is larger than the LUNA mcap https://t.co/24z3kPMpNv
— 찌G Promotion じ King of Scam Robots (@DegenSpartan) May 9, 2022
The Luna Foundation Guard (LFG), which is responsible for ensuring that UST remains pegged to the U.S. dollar, has been conducting damage control to try to mitigate any further losses and restore the stablecoin to $1.00.
In the face of several factors, its strategy of acquiring Bitcoin (BTC) to collateralize UST has yet to have a positive impact. Cointelegraph reported that starting on May 7, whales began dumping $285 million worth of UST, causing the stablecoin to fall to $0.98 and LUNA to a three-month low of $61.
As the LUNA price and UST peg itself looked volatile, LFG deployed $1.5 billion worth of BTC on May 9 as a means to add much-needed liquidity to the ecosystem. LFG lent tokens to trading companies to “protect the UST peg,” and lent 750 million UST tokens to accumulate BTC.
LFG held about 167,081 bitcoins, worth about $3.5 billion, as of May 5, when it announced that it had acquired an additional 37,863 tokens.
Terra founder Do Kwon appeared to be unaffected by the market impact in the six hours before this article was written, tweeting: “Deploy more capital – stable lads.” Shortly after, Cointelegraph reported on Tuesday that , LFG transferred 42,500 coins to various destinations, including the OKX cryptocurrency exchange. There has been no news since then.
Deploy more capital – stable lad
— Do Kwon (@stablekwon) May 9, 2022
Related: LFG to deploy $1.5 billion to back UST peg and build BTC reserves
However, the notion that BTC could be a viable support for a dollar-pegged stablecoin is being tested. According to CoinGecko, the BTC price fell from $39,874 to $30,269 during the same time period from May 5 to today, a drop of about 25%.
LFG’s constant tinkering with UST has drawn the ire of decentralization proponents, such as the head of strategy at Flashbots.net Hasu, who tweeted on Tuesday: “I don’t want people calling UST decentralized again.”
Regardless of the outcome, I don’t want people to call UST decentralized again. Even the small amount of collateral it has backed is opaque and controlled by one party. Used to perform discretionary open market operations. That’s 10 times worse than the Fed.
— Hasu⚡️ (@hasufl) May 9, 2022
At the time of writing, UST is down 22% from $1.
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