Cryptocurrency markets were sent into distress over the past several days, after stablecoin Terra lost its peg to the US dollar in what is speculated to be a sophisticated attack that even prompted concern from Treasury Secretary Janet Yellen.
Terra USD, or UST, the stablecoin on the Luna blockchain that aims to maintain a 1-to-1 peg to the US dollar, sharply plummeted to less than 30 cents by Wednesday, while the Luna token lost about 99% of its value since last week. The reason behind the sharp plummet has been the subject of heated online debate, with some attributing Terra’s untethering to a broader selloff of assets across crypto markets, and others suggesting that an attacker successfully executed a bitcoin short position that ultimately cascaded into a digital bank run.
There are currently about 18.5 billion UST coins in circulation, which are backed by bitcoin. However, the Terra coin is different from conventional stablecoins in that it is not backed by “real” assets such as fiat currency or bonds, but is rather an algorithmic stablecoin that, in theory, maintains its value via instructions encoded in software programs and active treasury management.
The controversial stablecoin is designed in such a way that if its price slumps to less than $1, investors are motivated to exchange their UST tokens for Luna coins, thus eliminating UST from circulation. If the price rises above $1, then the reverse occurs. Traders looking to take advantage of spread opportunities would frequently exchange UST for Luna and vice versa, which ultimately ensures that the price remains very close to, or at $1.
However, the intricate mechanism fell apart over the weekend when the UST failed to maintain its peg to the greenback. The sudden collapse prompted a number of Hail Mary interventions by its founder Do Kwon, who quickly attempted to boost the minting rate of Luna in an effort to diminish the stablecoin’s supply and subsequently boost its price. “I understand the last 72 hours have been extremely tough on all of you – know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” Kwon assured investors on Wednesday.
Still, the collapse caught the attention of regulators, who raised concerns about the inherent risks digital assets pose to traditional financial markets. “A stablecoin known as TerraUSD experienced a run and declined in value,” said Treasury Secretary Janet Yellen. “I think that this simply illustrates that this is a rapidly growing product and there are rapidly growing risks.”
Lune meanwhile this morning fell as low as $0.019, despite hitting an all time high of $119.56 just last month. As for Terra, after sinking as low as $0.259 yesterday, at the time of writing it is sitting at $0.588.
Information for this briefing was found via CoinMarketCap and the Financial Times. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.