The crypto sector has been experiencing a general downturn as almost all cryptocurrencies have dropped in value. LUNA, the native cryptocurrency of the Terra network, has completely collapsed and is now valued at $0. At the same time, the UST has fallen further below its peg. As of Friday, it is trading at a price of about $0.1, according to Coin Market Cap.
UST is meant to work as an algorithmic stablecoin, which means its value should always be at $1. Given the serious drop in value, experts have noted that it may never re-peg. As an algorithmic stablecoin, UST is not backed by any real-world assets. Instead, it is meant to maintain its peg through a system of burning and minting tokens.
It is highly likely that Terra will be the last algorithmic stablecoin that will ever gain mass adoption by the crypto community. Projects like TITAN also met a similar end.
Yesterday, Terra halted the block at a height of 7607789, citing concerns that the blockchain was being attacked.
Terra’s Bitcoin Reserve
UST has been having trouble maintaining its peg over the past few weeks, and this prompted the company to purchase Bitcoin reserves worth $1.5 billion. Do Kwon, the CEO of Terraform Labs, said that he wanted to acquire Bitcoin reserves worth $10 billion. This was meant to maintain the peg of the UST.
The company would lend out large sums of money over the past few days to try and get the UST to $1, but this would ultimately fail. With the crash of LUNA, UST would fall to a price of less than 50 US cents. It now seems to be collapsing entirely.
Still, Terraform Labs remains one of the top holders of Bitcoin in the world.
Effect on Tether
UST was the third-largest stablecoin in the world, and it also ranked among the top ten cryptocurrencies by marketcap. Its collapse shook the entire crypto community and triggered massive withdrawals from Tether, which is still the largest stablecoin. This would drive the price down slightly to a low of 95 cents. However, it would regain its peg, even after more than $3 billion left the network in a single day.
While Tether and UST are both stablecoins, they work in very different ways. According to Tether, its stablecoin is backed by actual US dollars, and this is how it can always trade at a price of 1:1 with the USD. While there have been concerns about the size of the company’s dollar reserves, it has worked well so far.
It is important to note that a lot of Bitcoin trading is done in Tether, so its collapse would have a significant impact on the entire crypto sector. Crypto investors usually turn to stablecoins like Tether in times of serious market volatility.
Why Does the Collapse of LUNA and UST Matter?
These two cryptocurrencies had very high market caps and attracted a large number of investors. Many people have been left in serious financial distress following the collapse of the cryptocurrencies, and this has led to some reports of self-harm.
The collapse of TerraUSD has also raised doubts about the stability of stablecoins. Some people have noted that the collapse could have resulted from a targeted attack, and it is not clear whether the same thing may be done to other stablecoins.
Another impact of this collapse is that the US government has started looking into regulating stablecoins. Janet Yellen, the Secretary of the US Treasury, noted that there are rapidly growing risks in stablecoins.
Yesterday, LUNA completely collapsed, and this led to a significant drop in the price of UST. The company has to stop the blockchain temporarily as it noted that it was experiencing governance attacks. Both of these cryptocurrencies may never recover as it can be difficult to regain the trust of the crypto community. The collapse of UST has forced the US government to look into the regulation of stablecoins.
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