Research Reveals UST Stablecoin And Its Kinds Pose Great Risks Ahead

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.