Terra’s LUNA Tumbles, Why This Could Be Bad For The UST Stablecoin

Terra’s native token LUNA slumped over the past week as a broader downturn in the crypto market hit the token particularly hard. It is the among worst performing tokens among the top-10 cryptocurrencies in the past week.

LUNA fell 4.6% in the past 24 hours to a 9-day low of $85.59. It has also lost nearly 9% in the past seven days, according to data from Coinmarketcap. Still, the token is up over 400% from where it was a year ago.

But LUNA’s recent losses have affected the reserve Terra maintains for its stablecoin UST. Data from the Luna Foundation Guard (LFG) shows LUNA makes up about 7% of the reserve’s value, which is otherwise dominated by Bitcoin.

Bitcoin makes up 78.9% of the reserve, while the stablecoin USDC comprises 12.8%.

LUNA drags UST reserve to near two-month low

Given that Bitcoin has hovered around the $40,000 mark for nearly a month, losses in LUNA appear to have dragged UST reserves to a near two-month low. The reserve is now at levels seen just as Terra founder began purchasing Bitcoin to bolster the reserve.

Total value in the reserve is at $2.13 billion, down nearly 40% from where it was a month ago.

A decline in the value of the reserve means that the UST stablecoin has fewer buffers protecting it against price shocks. This in turn could be detrimental towards the token’s stability. Still, such a price shock is yet to manifest.

UST recently became the third-largest stablecoin by market capital, at over  $18 billion. But the token still severely lags its peers in terms of trading volume, given that most of it is locked into DeFi platforms.

Terra needs to tread carefully

With Bitcoin expected to follow a holding pattern for the near future, the UST reserve’s value could be linked to LUNA’s price movements. Terra will likely need to increase the token’s burn rate to boost prices.

Earlier this month, LUNA had plummeted after Terra released some of its token reserves into circulation. More LUNA tokens are locked than in circulation, according to data from Terra analytics. 

Terra will have to be cautious in how it treats LUNA prices going forward. Buying Bitcoin is also a risky prospect, given that crypto market sentiment is in extreme fear.