A stablecoin going of peg is always a disconcerting situation and the massive $UST going down by over 50% after a weekend of crazy trades has caused a bit of a stir. But why did UST go off peg?
How does a stablecoin stay on peg
All stablecoins have a currency of commodity to which it is pegged in which they find stability. This stability is achieved either by big back roles backing it or by algorithmic mechanisms of buying and selling the asset, or it’s derivate’s. to which it is pegged.
$UST is pegged to $LUNA. One can always redeem 1 $UST for $1 worth of $LUNA. This encourages holders of $UST to exchange it for $LUNA which then increases the value of $UST, thus the trading of these two coins are incentivized and stability achieved.
The utility of the stablecoin is also of utmost importance. TerraUSD aka $UST find’s it utility in Anchor Protocol. They are a lending and borrowing protocol that provides crypto natives, fintech companies, and investors a stable high interest rate of up to 19.5% to stake $UST. This in inself actually caused the $LUNA price to soar earlier this year as more investors wanted a piece of this pie.
Why did UST go off peg
In a nutshell, the recent market turbulence put too much pressure on LUNA and UST.
$UST, unlike $USDT and $USDC which is pegged to FIAT, is algorithmic which basically means it’s price is maintained by code in the unseen background of the markets. $UST is burned for $LUNA to be minted and vice versa which affects the value of $UST.
Now, users started exchanging $UST for other stablecoins when $UST began trading well below it’s peg. This caused the $UST curve pool to shrink notably. Much short selling on $UST ensued which in turn caused the price $LUNA to decline drastically. Terra was thus forced to mint more LUNA to try and counter the negative price pressure. They did not succeed.
What’s next for LUNA and UST
Things aren’t looking good with a mass exodus away from $LUNA. This could spell the end of not only $LUNA but the entire Terra ecosystem.
