Apr. 2022, Vincy
Data Source: Footprint Analytics — Algorithmic Stablecoin Analysis
TerraUSDT (UST) is — though “was” might be better — an algorithmic stablecoin whose stability mechanism stemmed from the promise of a payout with LUNA. Traders mint and burn tokens as needed to ensure the stability of UST out of trust in the Terra blockchain.
However, in the last week, the UST’s price crashed, falling below ten cents and completely losing its peg. Before its decoupling from USD, UST was the third-largest stablecoin by market cap. This makes the collapse one of the most concerning developments in crypto and something that everyone interesting in blockchain needs to understand.
Why did UST, which has been so stable for so long, decouple? What are the consequences?
Before analyzing UST’s decoupling, let’s look at how it differs from the legal and over-collateralized stablecoins.
UST is a stablecoin anchored to $1, but without sufficient collateral assets. Once the token price fell below $1, its whole ecosystem, including LUNA and the Anchor protocol, were dragged down with it.
Footprint Analytics data shows that UST was stable at around $1 for about 1 year, from May 27, 2021 to May 8, 2022. During this time, LUNA’s price has seen 2 major increases, peaking at $116.32.
The stability of UST at the $1 anchor was the driving force behind the growth of Terra’s ecosystem.
However, these mechanisms and reserves were not enough to sustain the stability of UST.
The price of UST fell from $1 on May 8 to around $0.18 on May 14. It briefly bounced back up, teasing that perhaps the mechanism would be resilient enough, but then resumed its crash.
As of May 16, UST appears to be dead and has killed the market’s confidence in algorithmic stablecoins as well.
What happened?
This has a negative impact on the anchoring of UST and the development of the Terra ecosystem.
With its precipitous collapse, the Terra ecosystem appears to be dead.
With UST below $1, the price and market confidence in Terra’s native token, LUNA, collapsed. Footprint Analytics data shows that the drop in LUNA’s token price and the rapid abandonment of UST by UST holders led to more Minting of LUNA, which triggered an even deeper drop in LUNA. As of May 16, LUNA’s token price fell below $0.11 from a peak of $116.32, a 99.9% drop in less than a month.
The market cap of UST and LUNA has inverted, with LURA’s market cap being smaller than UST’s. When LUNA falls, sufficient liquidation space is generally reserved to avoid extreme situations of insolvency.Now the market cap has fallen off a cliff to $1.2 billion for LURA and $1.15 billion for UST. This drop could easily cause confidence to collapse and a death spiral to occur.
Of course, in addition to the currency price, market cap and other indicators being affected, there are also Terra ecosystem protocols TVL showing negative growth. Especially for protocols such as Anchor and Lido, TVL has dropped by more than 100%. Anchor is the most affected by the algorithm stable currency UST, while Lido is affected by the drop in the price of LUNA.
The current market panic is still spreading, the algorithmic stablecoin UST is severely unanchored, and the LUNA token price has seemed to take a catastrophic hit. While its survival doesn’t seem likely, crazy things can happen in the crypto world.
This piece is contributed by Footprint Analytics community.
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