TerraUSD, or UST, has recently gained attention after the so-called stablecoin, which is supposed to be pegged one-to-one with the US dollar, fell sharply below the $1 mark.
UST is an algorithmic stablecoin that uses code to keep its price stable at around $1 through a complex system of minting and burning. To keep the dollar peg, a UST token is created by destroying some of the related cryptocurrency luna.
Unlike Tether and USD Coin, UST is not backed by any real-world assets such as bonds. Instead, the Luna Foundation Guard, a non-profit founded by Terra’s founder Do Kwon, has approximately $3.5 billion in bitcoin on hand.
However, in times of market volatility, such as this week, UST is being put to the test.
Its peg has been broken, and investors are now rushing to sell the associated luna token. According to Coin Metrics data, the price of Luna has dropped from around $85 a week ago to around 4 cents on Thursday, making the cryptocurrency almost worthless.
Binance, one of the world’s largest cryptocurrency exchanges, announced on Thursday that the Terra network, the blockchain associated with the luna token, is “slow and congested.” As a result, Binance reports a “high volume of pending Terra network withdrawal transactions” on its exchange, indicating that investors are rushing to sell luna.
Because of the congestion, Binance had to temporarily halt luna withdrawals on Thursday before resuming them.
The TerraUSD controversy has spread throughout the cryptocurrency market. This is due to the Luna Foundation Guard keeping bitcoin as a sort of reserve. The organisation may now be forced to sell off its bitcoin holdings in order to maintain the peg.
Bitcoin has dropped more than 29 percent in the last seven days, falling below $26,000 at one point on Thursday to trade at its lowest level since late December 2020. But it has started it’s recovery today.
Tether, the world’s largest stablecoin, also fell below its $1 peg on Thursday, amid a broader panic in cryptocurrency markets.