The sea of red in the crypto market has caused issues with Terra’s UST stablecoin, which relies on bitcoin as a reserve currency. The plummeting LUNA price has also caused liquidations totalling nearly US$900 million.
Terra Stablecoin Crashes
During the past week, a marketwide correction has been ravaging the cryptocurrency market, with LUNA hit harder than others. This is mostly due to a negative feedback loop that happened when the chain tried to stabilise its native TerraUSD (UST) algorithmic stablecoin. UST works with its sister token, LUNA, to maintain a price of around US$1 using a set of on-chain mint-and-burn mechanics.
The Terra public blockchain has seen massive growth in its ecosystem and the use of its TerraUSD (UST) stablecoin, mostly due to its key DeFi platform Anchor’s 20 percent returns. LUNA is the primary asset used to regulate and maintain the value of the algorithmic stablecoin. Created by Terraform Labs and its CEO/co-founder Do Kwon, the stablecoin used reserves of BTC to back its 1:1 value against the US dollar.
The UST software automatically adjusts the price of LUNA, so that $1 of LUNA always matches $1 UST, thereby mimicking the US dollar. The asset was trading at around US$90 during the past month and has since dropped to below $1, losing about 99 per cent of its value in a matter of days.
As reported earlier this month, the stablecoin lost half of its value because it started losing its peg to the dollar:
This is $18 billion in wealth that we’re seeing evaporate before our eyes, and people are losing money.
Todd Phillips, director of financial regulation and corporate governance, Center for American Progress
Liquidations Triggered by Collapse of UST
As the price of Bitcoin crashed past US$30,000 – a 10-month low – over-leveraged traders were also caught out. According to data from Coinglass, in the past 24 hours almost 300,000 traders have been liquidated for US$896 million:
This situation stands as a reminder of why stablecoins – which play a pivotal role in the functioning of decentralised finance – not only pose a risk to individual traders but also a systemic risk to the entire crypto ecosystem if not managed responsibly.
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