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Terra’s Luna Plunges After Stablecoin Network Splits From Dollar Again

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  • Terra’s crypto luna crashed 45% on Tuesday, after the network’s stablecoin again lost its peg to the dollar.
  • Over the weekend, strong selling drove TerraUSD below the $1 mark.
  • In response, the project’s steering group said it would sell some of its massive bitcoin reserves to back the token.

Terra Network’s luna token plunged as much as 61% on Tuesday, after sister stablecoin TerraUSD lost its peg to the dollar for the second time in as many days.

TerraUSD is an algorithmic stablecoin with a value fixed at $1. Unlike traditional stablecoins which are backed by fiat currency and hard assets – including government bonds or even gold – the UST, as it is called, has its value set by a computer algorithm. .

When the UST drops below $1, traders can “burn” coins, removing them from circulation, in exchange for $1 worth of luna, the network’s sister token. This restricts the supply of UST, again increasing its value. If the UST rises above $1, then traders sell luna to convert it to UST, which lowers its price.

Over the weekend, strong selling of UST forced its value below $1, exacerbating the downdraft and prompting developer group Luna Foundation Group (LFG) to step in and commit to consolidating the stablecoin. .

But strong


volatility

in the broader financial markets on Monday, as investors worried about the prospect of soaring interest rates and inflation, hit the crypto market. The UST decoupled from the dollar again, leaving the luna token in freefall on Tuesday.

Luna was last down 48% at $31.89 in early European trading, after hitting an overnight low of $24.14, according to CoinMarketCap. The UST, meanwhile, was holding at $0.9196, after plunging to just $0.68 overnight.

“Over the past few days, volatility in the crypto asset market has been significant. The market turmoil is also reflected in the uncertain macroeconomic conditions of the past week in legacy asset classes,” LFG said. tweeted Monday.

“Consistent with the LFG’s mandate, the LFG will proactively advocate for the stability of the $UST peg and the broader Terra economy, particularly amid volatile and uncertain macroeconomic conditions in legacy markets. “, said the group.

LFG said on Tuesday it would inject $1 billion worth of bitcoins, along with more funds from other cryptocurrencies, to support UST.

Last week, LFG announcement he had purchased $1.5 billion worth of bitcoins to add to his reserves. It has stated in the past that it intends to acquire $10 billion worth of bitcoins for its reserves.

“For the first time, you’re starting to see a pegged currency that tries to meet the bitcoin standard,” Terra Labs co-founder and CEO Do Kwon said after LFG’s announcement last week.

However, algorithmic stablecoins are controversial even within the crypto community. “It’s a lot more dangerous than taking a Treasury bill and tokenizing it,” Paxos chief executive Charles Cascarilla told The Wall Street Journal last month. Paxos issues Binance USD, a monetary asset-backed stablecoin.

the


Federal Reserve

also issued a note of caution on stablecoins in a report released on Monday. He said the risk of sudden redemptions of stablecoins is similar to that of money market funds.

“These vulnerabilities can be exacerbated by a lack of transparency regarding the risks and


liquidity

of assets backing stablecoins,” he said.

As the UST began to slump over the weekend, several crypto watchers witnessed large drawdowns of the token from Anchor Protocol, which acts as a bank for the UST. A major holder sold $285 million worth of the token, crypto news site CoinTelegraph reported.

GLF said in a tweet on Monday that he would lend bitcoin to trading companies. “Deploy more capital stable guys,” Do Kwon later tweeted.

This in turn weighed heavily on bitcoin, which fell below $30,000 for the first time since last July. It has already lost 33% this year and is more than 60% below its all-time high of $69,000 from last November.

Crypto exchange Binance temporarily suspended luna and UST withdrawals on the Terra network early Tuesday due to a high number of withdrawal orders. It has now resumed the service, which was suspended for more than six hours, but said it would continue to monitor network conditions.

Read more: The hacks force investors to run protocols that become “too big to fail,” says a partner at a billion-dollar crypto asset manager. He shares how the rise of crypto “honeypots” and nefarious actors is shaping the way he invests.

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