This past weekend, things got very hairy in the crypto market — coins started dropping across the board. By Monday evening, it looked like “just another crypto crash.” Billions of dollars of value were erased.
However, every crash has its catalyst — and for this one, it wasn’t the collapse of an exchange, ICO scams, or some mutual agreement among market participants that things needed to cool off. Instead, at the center of this collapse was Bitcoin and its tangential relationship with the Terra blockchain.
Terra, which has been described as a chain for stablecoins and assets, was the issuer of the world’s most-valuable algorithmic stablecoin. That stablecoin, $UST, had over $19 billion in circulation before this weekend. That coin, which is supposed to be worth $1.00, was kept at that price point by software.
Several weeks ago, we documented the early days of the Terra-Bitcoin love story: the Luna Foundation Guard (LFG) and Terra’s most foremost figure, Do Kwon, indicated their desire to back the Terra stablecoins with Bitcoin. In the eyes of Do Kwon and the LFG, this backing would help maintain its $1.00 peg.
Unfortunately, that all unfolded this week after a slew of liquidity attacks sent the stablecoin stumbling off its $1 peg. The attackers assumed that LFG, which had acquired billions worth of Bitcoin, would defend its peg before it defended its deposits. So far, that math has worked out.
$UST has traded as low as $0.20 since this drama unfolded… so, in short, it’s doing a very bad job of staying stable. At the time of our last edition of The Litepaper, $UST was sitting around $0.70, and we detailed one way that the LFG detailed for how it would try to defend the peg. Ultimately, it didn’t work — and so scores of LUNAtics laid in wait.
After waiting for days, the blockchain’s leader Do Kwon offered new insight into the next steps for recovering the Terra chain and its prized UST peg in a tweet chain.
In it, he indicates that “the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg.” He offered a proposal for the community to vote on which should affect how quickly the system could absorb UST.
However, he offers concessions — adding that rebuilding $UST to last will likely necessitate moving away from its novel “algorithmic stablecoin”/software mechanics. It insinuates that $UST will be collateralized, or backed by assets, in the future. This statement fares badly for other “competing” algorithmic stables, but offers a boost of confidence to long-standing overcollateralized (meaning: backed by more than is in circulation) stablecoins.
In the aftermath of Do Kwon’s tweet, $UST moved back up to the mid-$0.70s. However, $LUNA.X looked ready to go sub-$1. In this chart, $UST is represented in orange (its pricing on the left) while $LUNA.X is represented by the bars (and its pricing is on the right.)
In the case that happens, people would presumably be able to redeem $LUNA.X for $UST at a discount (which won’t mean much until it actually hits the current price of $UST, seeing as though it’s already below the peg.) However, this might actually increase the likelihood that $LUNA.X and $UST might be able to return to parity.
Or, maybe it just won’t… it’s anybody’s best guess at this stage in the game.
$LUNA.X fell more than -93% today, bringing its cumulative losses this week to -98%.