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A LUNA Tale: 99% Under At $0.02 After UST’s Depeg

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Terra Luna down 99% after UST depeg
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Today marks the sixth day of LUNA’s steady descent (99% at the time of writing) after its algorithmic stablecoin, UST, depegged from the US dollar over the weekend.

Why UST Depeg Affects LUNA So Much

UST was created and is maintained by Terraform Labs. Terrafoam Labs also maintains the Terra blockchain and LUNA, the sister cryptocurrency of the platform.

UST and LUNA are inextricably linked because you must burn LUNA to create UST and vice versa. You can always (in theory) exchange 1 UST for $1 worth of LUNA. 

UST is unlike other stablecoins in the crypto space. It is pegged to the dollar but it is not backed by actual cash in a bank. It is an algorithmic stablecoin. 

This means that it maintains its dollar peg through a different mechanism. Terra designed the system to play to users’ demand and supply. If demand for UST drops and its price loses its peg to the dollar, arbitrageurs will sell LUNA for UST until the balance is restored.

LUNA: What The Terra Team Missed

What Terrafoam Labs didn’t foresee was a situation where there was no demand for LUNA or UST. 

After UST’s depeg from the dollar over the weekend, selling pressure on LUNA came in full force. The Luna Foundation Guard contributed to this by supplying 46 million tokens to maintain UST’s 1:1 peg with the U.S dollar.

As highlighted by users, the 20% APY offered on deposits by Anchor Protocol, the top DeFi platform on Terra Blockchain, was also unsustainable. The protocol has seen its total volume locked (TVL) slump to about $3 billion from almost $18b billion after UST’s depeg from the dollar.

Proposed Plans To Repeg UST And Save LUNA

The Anchor Protocol: Anchor aims to lower minimum interest rates to 3.5% and maximum deposit rates to 5.5%. The current yield of 18% would be temporarily reduced with a “targeted interest rate of 4%.

Reducing the interest rate would prevent the Anchor reserve from depleting and contribute to “stopping the depeg death spiral.”

The Luna Foundation Guard (LFG): The LFG in simple terms plans to loan 750m Bitcoin to the market and release 750m UST to absorb the Bitcoin. Read full information here.

Conclusion

Every stablecoin has one criteria: Be stable. When this criteria is overlooked, it poses a cause for concern. 

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