LUNA plummets 99.9% as UST decouples from USD

However, in the last week, the price of UST crashed and fell below 10 cents, completely losing the role of the peg. UST was the third-largest stablecoin by market capitalization before depegging from the U.S. dollar. This flash crash became one of the most worrisome developments in the crypto space and something everyone interested in blockchain needs to know.

Why is UST, which has been stable for a long time, depegged? What are the consequences?

Algorithmic stablecoins are different from other stablecoins

Before analyzing the decoupling of UST, let’s see how it differs from fiat stablecoins and overcollateralized stablecoins:

• Algorithmic stablecoins do not require any collateral. On the contrary, they adjust the amount of currency held by users through currency price fluctuations. When the currency price rises, it decreases, and when the currency price falls, it increases.
• Fiat stablecoins and over-collateralized stablecoins require collateral in exchange for them. For example, Tether (USDT) fiat stablecoin needs fiat currency USD as collateral. Over-collateralized stablecoins need to be collateralized with digital currencies BTC and ETH. Due to the large fluctuations in BTC and ETH prices, the collateral must be over-collateralized.

UST is the same as a stablecoin pegged to $1, but without sufficient mortgage assets. Once the currency price falls below $1, its entire ecology, including LUNA and the protocol Anchor, will be dragged down.

Trend analysis before and after UST price decoupling

UST currency price is stable at $1

According to Footprint Analytics data, from May 27, 2021 to May 8, 2022, UST has stabilized at a price of around $1 for about one year. And the price of LUNA also experienced two surges, reaching a peak of $116.32.

Footprint Analytics - Token Price: UST vs LUNA

The stability of UST anchored at $1 is the driving force for Terra's ecological growth.

• The liquidity of the Anchor protocol in the past accounted for 50% of Terra TVL, and the stable storage income supported the stability of UST at $1. It provides more than $267 million in UST yield reserves, which allows users to deposit UST on the protocol to earn an APY of about 20% - much higher than the yield of other stablecoins. Yield is a big factor driving demand for stablecoins and has also helped Anchor attract a TVL of $17.2 billion.

Footprint Analytics - Anchor TVL vs UST Price

• LFG (Luna Foundation Guard) was established in January 2022 to support the stability of UST and promote the development of Terra ecology. In February, it raised US$1 billion in financing from multiple VCs by selling LUNA, with BTC as the backing to help anchor UST and the development of Terra ecology.

However, these mechanisms and reserves cannot maintain the stability of UST.

Why should UST be decoupled?

The price of UST fell from $1 on May 8 to a low of $0.18 on May 14. It bounced briefly, foretelling that maybe the mechanism would be resilient enough, but then the flash crash resumed.

As of May 16, UST appears to be dead, killing market confidence in algorithmic stablecoins.

What happened?

• On May 7th, a giant whale dumped UST worth $285 million. This was the trigger that prompted the decoupling of UST from the US dollar.
• With UST losing its peg, LUNA is being released. This is because users abandon the unpegged UST in their hands, resulting in more Minting of LUNA, which leads to a deeper decline in LUNA.
• However, the devaluation of LUNA happened so quickly that it simply couldn't buy back enough UST to repeg it back to $1.
• Both LUNA and UST are down to pennies.
• Terra, which relied on the Terra Fund to keep replenishing its reserves to pay about 20% APY, also collapsed.

Screenshot Source - Anchor Website Yield Reserve

• LFG's BTC reserves were supposed to act as a backstop to help anchor UST. However, the price of BTC has been falling since its peak in November last year. As of May 16, the price of BTC has fallen below $30,000.

Footprint Analytics - BTC Price

This has a great negative impact on the anchoring of UST and the development of Terra ecology.

After the price of UST falls, how will it affect the Terra ecology and cryptocurrency

After UST fell below $1, the price and market confidence of Terra's native token LUNA collapsed. According to Footprint Analytics data, the price of LUNA fell, and users who held UST quickly abandoned the UST in their hands, which led to more Minting of LUNA, which led to a deeper decline in LUNA. As of May 16, the price of LUNA fell from the peak of $116.32 to below $0.11, a drop of 99.9% in less than a month.

Footprint Analytics - Daily Mint & Burn: LUNA

Then the market value of UST and LUNA appeared inverted, and the market value of LURA was smaller than that of UST. When LUNA falls, there is generally enough room for liquidation to avoid extreme insolvency. Today, the market value has fallen precipitously to $1.2 billion for LURA and $1.15 billion for UST. This drop can easily cause users' confidence to collapse and fall into a death spiral.

Footprint Analytics - UST vs LUNA of Market Cap

Of course, in addition to the impact on indicators such as currency prices and market value, there are also negative growth in the TVL of various protocols in the Terra ecosystem. Especially for agreements such as Anchor and Lido, the TVL has dropped by more than 100%. Among them, Anchor is most affected by the algorithmic stable currency UST, while Lido is affected by the decline in the price of LUNA.

Footprint Analytics - Terra Top 10 Protocols TVL Change

summary

The current market panic is still spreading, the algorithmic stablecoin UST has seriously de-anchored, and the price of LUNA has suffered a catastrophic blow. While its survival seems unlikely, crazy things can happen in the world of cryptocurrencies.

This article is contributed by the Footprint Analytics community

The above content is only a personal opinion, for reference and communication only, and does not constitute investment advice. If there are obvious understanding or data errors, feedback is welcome.

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