Research Reveals UST Stablecoin And Its Kinds Pose Great Risks Ahead

By Sunil Sharma
May 11, 2022 Updated May 11, 2022
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LFG's reserves a fraction of their earlier value

On the 10th of May, the UST dollar peg hit lows of $0.6. The stablecoin was challenged over thin liquidity, shortly after the Luna Foundation Guards (LFG) finished building its $3 billion treasures last week. 

UST Dollar’s de-pegging first emerged as huge withdrawals from pool 53 in Anchor, and thereon, plunged from $1 to $0.98. Anchor is Terra’s largest yield-earning protocol that steered the highest demand to UST. In just a few days, UST highest profitability source (Anchor) lost 60% of its deposits to the de-pegging.

LFG’s proactive strategy for UST Dollar

This led to a sell-off of bitcoin by traders, and mutual anticipation that LFG would turn to liquidate its BTC reserves to sustain the peg. On May 9th, LFG announced a proactive strategy accordingly, which would involve decentralising its reserve strategy.

Shortly after the announcement, the disruption settled, but UST could not stabilize its $1 peg permanently. It declined to $0.9 and accelerated more pull-outs, which led to a $0.6 decrease. Even if the LFG manages to restore the peg, much damage has been done already.

Takeaways from the current UST situation

 The UST stable coin keeps going farther from being a decentralized stablecoin, regardless of the recent efforts to maintain it. As a result of network congestion from UST withdrawals, LUNA’s price has experienced a sharp decline (standing at $13.68) and temporary suspension. While UST returned to a downward spiral, LUNA’s value dropped by 66% in 24 hours. 

Meanwhile, it seems that the BTC reserves might not be sufficient enough to confidently maintain the peg.  

UST might charge back up with LFG’s involvement, but the long-term effects on its reputation and the trust steadily garnered from investors will take longer to come out from. The state of the UST is a reminder that better frameworks should be established to include structural risks for similar algorithmic stable coins. 

Sunil is a serial entrepreneur and has been working in blockchain and cryptocurrency space for 2 years now. Previously he co-founded Govt. of India supported startup InThinks and is currently Chief Editor at Coingape and CEO at SquadX, a fintech startup. He has published more than 100 articles on cryptocurrency and blockchain and has assisted a number of ICO's in their success. He has co-designed blockchain development industrial training and has hosted many interviews in past. Follow him on Twitter at @sharmasunil8114 and reach out to him at sunil (at) coingape.com
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.

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