A Timeline of the Terra UST De-pegging


Crypto markets have continued to tank, and the Terra ecosystem’s woes are not over. UST decoupled from its peg earlier this week. Here is a timeline of events that unraveled the world’s third-largest stablecoin.  

This time last week, Terra USD (UST) was the world’s third-largest stablecoin. Today, it has tanked in value by a third, trading at $0.55 at the time of writing. The stablecoin started to decouple from its dollar peg on Tuesday, May 10, and it has not been able to regain it since.

Furthermore, the multi-billion dollar algorithmic asset dumped to below $0.30 on May 11, so what actually happened?

Crypto researcher @jonwu_ posted a sequence of events and an explanation of what caused the collapse of UST.

Causes of the Crash

UST is backed by the LUNA token, which means that users can always redeem LUNA for UST dollar-for-dollar and vice versa.

Additionally, the stablecoin was heavily entwined with a number of DeFi platforms, but primarily the Anchor Protocol. Anchor Protocol is a decentralized money market built on the Terra blockchain offering high yields on stablecoins such as UST.

A large portion of the UST supply was locked in the Anchor Protocol, the researcher added. Some DeFi platforms such as Abracadabra borrowed more to get even greater returns that it claimed were “risk-free.”

Abracadabra Money’s Degenbox unwound in January, pushing LUNA prices down. Furthermore, every UST in circulation reduces the circulation of LUNA due to the burning and redemption mechanism.

The researcher stated that it is a big problem if the average redemption price of LUNA for UST is high relative to LUNA’s current price.

“So suddenly – again, for no good reason at all – there’s a shit-ton more $LUNA in circulation being dumped on the open market. This is – in essence – what’s happening today.”

Jeremy Allaire, the chairman and CEO of Circle, the issuer of the USDC stablecoin, confirmed the risk timeline, speaking to TechCrunch:

“Our own internal analysis, which we’ve had over the past six to nine months, is that [UST] was a building risk. It was a very high-risk framework for a stablecoin.”

LFG’s Big Bitcoin Gamble

In February, the Luna Foundation Guard (LFG) announced they had raised $1 billion dollars for a BTC reserve for UST. The funding was led by Jump Crypto and Three Arrows Capital.

This triggered a massive run-up in LUNA, which allowed for a lot of high-basis UST minting. Additionally, LUNA hit an all-time high of $119 in early April. Today it has crashed to almost zero, or less than $0.30.

With Bitcoin prices tanking, redemptions for UST will be considered as losses for the LFG, he added.

Possible Outcomes for Terra

Market makers and investors may deploy some of that BTC treasury in order to buy UST to keep its peg up. The LFG may buy more BTC back at lower prices and wait for markets to recover.

Furthermore, Terraform Labs CEO Kwon Do suggested a recovery plan on May 11.

He said that the only path forward will be to absorb the stablecoin supply that wants to exit before UST can start to repeg. A proposal to increase the minting capacity was also approved.

“We will continue to explore various options to bring in more exogenous capital to the ecosystem & reduce supply overhang on UST,” he added.

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