August 19, 2022

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What is terraUSD (UST) and how does it affect bitcoin?

Pedestrians walk past a display of cryptocurrency Bitcoin on February 15, 2022 in Hong Kong, China.

Anthony Kwan | Getty Images

A multibillion-dollar bet that bitcoin can act as a “reserve currency” for the crypto economy is already being tested as UST, a controversial stablecoin, struggles to maintain its $1 peg.

UST dropped close to 99 cents over the weekend, fueling fears of a potential “bank run” that could force Terra, the project behind it, to dip into a $3.5 billion pile of bitcoin to support the token.

Now, the Luna Foundation Guard, an organization created by Terra’s inventor Do Kwon, says it will lend out $750 million in bitcoin to trading firms to hold UST’s price peg. But that’s done little to assuage investors’ concerns about the implications for bitcoin.

What is UST?

Terra’s protocols also feature an arbitrage mechanism, where investors can exploit deviating prices in each of the tokens. For example, too much demand for UST may result in its price topping $1. That means traders can convert $1 worth of luna into UST, and pocket the difference as profit.

The model is designed to even out supply and demand for UST. When the price of UST is too high, users are incentivized to burn luna and create new UST, increasing the stablecoin’s supply while also decreasing the amount of luna in circulation.

“The luna becomes more scarce, which makes it more valuable, transferring that value into UST,” Alexander says.

When UST’s price is too low, the reverse happens — UST gets burned and luna is minted. That should, in theory, help stabilize prices.

The problem

“This assumes normal market conditions,” said David Moreno Darocas, a research analyst at CryptoCompare.

“During periods of high volatility and one-sided buy/sell activity for UST, the above stabilizer may not be sufficient to maintain the peg in the short-term.”

There have been multiple instances where UST has decoupled from its $1 peg, raising concerns about the viability of its economic model — particularly in a situation when several people try to redeem their tokens at once.

The latest challenge arrived over the weekend. Hundreds of millions of UST was sold on Anchor, Terra’s flagship lending platform, as well as Curve and Binance, resulting in accusations of a “coordinated attack” on the stablecoin.

“Men will literally attack a stablecoin unsuccessfully instead of going to therapy,” Do Kwon, the South Korean crypto entrepreneur who co-founded Terraform Labs, said in a since-deleted tweet.

‘Reserve currency’

What it means for bitcoin

https://www.cnbc.com/2022/05/09/what-is-terrausd-ust-and-how-does-it-affect-bitcoin.html