Over the past few days, TerraUSD or UST has lost its peg to the USD and multiple other stablecoins several times.
The lowest drop was on Monday, when its price fell to $0.65. The price of LUNA, the native cryptocurrency of the Terra network, has also fallen significantly, around 50% since yesterday – considerably more than the general drop in crypto prices. When writing this on Tuesday, you have to pay about 1.08 UST in order to receive 1 USD Coin (USDC) or 1 Tether (USDT).
As a stablecoin, UST is supposed to maintain its value as close as possible to $1 at all times. It isn’t backed by any actual US dollars and instead relies on financial engineering mechanisms to maintain its value. This system has been described as risky since it requires investors to push the price back to $1. As market researchers have noted, this mechanism may not work very well when the market conditions are unusual. The stabilization mechanism may fail during periods of high volatility or massive one-sided buy or sell activity.
That is actually one reason why the coin has been struggling to maintain its price. Over the weekend, large amounts of UST were withdrawn from liquidity pools on Curve, a fairly popular decentralized exchange. At the same time, $192 million worth of UST was dumped.
Investors have not been willing to buy the coin and instead chose to sell as the price kept falling way below the $1 mark.
How are they trying to keep the value?
To keep the price of this stablecoin at $1, investors can always burn their UST and get new LUNA at $1. This mechanism reduces the supply of UST and helps to raise the price back to $1. Conversely, when the price of TerraUSD goes above $1, investors can burn LUNA and get TerraUSD.
Last week, Terra Labs, the company behind UST, purchased $1.5 billion worth of Bitcoin to work as the reserve for UST. The company aims at raising the reserves to $10 billion, and at the moment, it has already hit the $3 billion mark. The company noted that UST will be the first cryptocurrency to be backed by Bitcoin. During the drop for Bitcoin, Crypto Lists wonder how safe this kind of initiative really is?
To maintain the USD peg, the company plans to loan out $750 million in BTC to various trading firms. It will also use 750 million UST (around $750 million) to purchase Bitcoin. People will then trade the capital from both sides of the market, and this will help the price stabilize.
This new system is already being tested as the coin is proving to be a little unstable. What do you think will happen? Are we going to see a total collapse of UST and LUNA, or are they going to make an amazing comeback? In either case, Kucoin (review) is amazing with both long and short positions in those coins being offered. Give Kucoin a try today!
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What is UST?
UST is classified as a stablecoin, and that means its price does not fluctuate. Unlike coins like BTC, its price doesn’t rise or fall depending on market conditions; it is designed to trade at $1 at all times. Whenever the price deviates from $1, its mechanism ensures that the issue is quickly corrected.
UST is currently the largest algorithmic stablecoin. It isn’t backed by any USD assets and simply maintains its value by creating and destroying supply. It is also the fourth-largest stablecoin, after Tether (USDT), USD Coin, and Binance USD. Since it is extremely popular, investors and traders can buy or sell it on most major crypto exchanges.
UST is one of the many stablecoins that use the Terra network. Others tokens in the network include Terra Euro and Terra Pound.
Conclusion
TerraUSD or UST is a stablecoin that is supposed to trade at a price of $1 at all times. Over the last 48 hours, the price of the cryptocurrency has failed to maintain its peg as millions of UST were dumped and withdrawn from the liquidity pools on Curve. The coin is supposed to maintain its value through a system of burning and creating new UST, but this has proven to be insufficient. The company behind the cryptocurrency has had to purchase billions of Bitcoin to work as the reserve currency of TerraUSD.
You can always get updates on UST at Crypto Lists.
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