The price of LUNA dropped over 50% during yesterday’s crypto trading session following news that the Luna Foundation Guard (LFG) drained $1.5 billion from its Bitcoin reserve in a move that sought to defend UST’s peg to the US dollar as withdrawals of the stablecoin keep soaring.
LUNA is the token that powers the Terra blockchain and its primary purpose is to be used as a stabilizer of the network’s stablecoins via mint and burn mechanisms. According to the project’s whitepaper, Terra uses Luna to guarantee that its stablecoins remain pegged by allowing investors to exchange $1 in UST for $1 in LUNA at any given point.
However, UST drifted off its peg yesterday and fell to nearly $0.60 per coin as traders withdrew a significant amount from the Anchor protocol – a DeFi platform that offered sizable rewards for staking the stablecoin.
Confidence in Terra Labs – the creators of the Terra blockchain – to maintain the value of UST pegged to $1 per coin appears to be diminishing and that could be prompting investors to pull their money off the token as the mechanisms that should maintain the peg appear to have been ineffective thus far.
UST’s pains started during the weekend when a handful of whales pulled out billions of dollars from Anchor and Curve and prompted the stablecoin to drift off its peg for the first time.
LFG responded by strengthening the token’s liquidity through a $1.5 billion injection directed to market makers who supposedly carried out the required buy and sell transactions to move UST back to where it should be.
As of this morning, the value of UST is standing at $0.93 per coin – a 23% recovery compared to yesterday’s closing price – while the price of LUNA is climbing 10% at $32.94 per coin.
The outspoken co-founder of Terra Labs, Do Kwon, has remained relatively silent during this recent crisis. During yesterday’s rout, the Korean crypto entrepreneur tweeted “Deploying more capital – steady lads”. This has been the only comment he has made thus far since this latest incident.
As a result of these recent events, Binance announced earlier today that it temporarily halted UST and LUNA withdrawals made via the Terra network due to “network slowness and congestion”.
However, the cryptocurrency exchange resumed withdrawals only a few hours ago but stated that they will “continue to monitor the network conditions and provide further updates” if required.
UST’s Detractors Take the Chance to Highlight the Project’s Flaws
Crypto twitter – as the crypto community within the social media network is often known – has been flooded by both positive and negative comments about UST and its plan to become the go-to stablecoin with detractors of the project pointing to several weaknesses in its stabilizing mechanisms and other characteristics of its design.
Some of the most heated comments point to UST as being a rather large Ponzi scheme that uses the Anchor platform, whose rewards are markedly high at around 20% per year for UST staking, as bait to lure investors to stock up on UST as a mechanism to inflate the value of LUNA.
Meanwhile, others emphasize that the actions of the Luna Foundation Guard and its ability to make decisions that directly affect the value and functioning of both UST and LUNA make it a centralized solution rather than a decentralized alternative to fiat currencies – whose dynamics are highly influenced by the actions of central banks.
Finally, crypto enthusiasts have pointed to LFG’s sizable Bitcoin (BTC) liquidation as the leading cause of the sharp decline that the cryptocurrency experienced yesterday. This morning, Bitcoin is surging nearly 7% at $32,100 per coin.
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