Saturday, December 3, 2022

Terra’s LUNA Dropped 10% Due To UST De-peg Concerns

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Terra’s LUNA dropped 10% due to the concerns about the de-peg of the UST stablecoin and although a 1% depeg from $1 is not unusual when the markets are under pressure things could go wrong so let’s read more today in our latest altcoin news today.

Terra’s LUNA dropped 10% to $65.80 on fears that Terra’s stablecoin UST may lose its peg. The stablecoins are cryptocurrencies that are pegged to the fiat currency such as the US Dollar on a 1:1 basis and a de-peg refers to stablecoins going above $1 or below $1. The UST stablecoin fell as low as $0.985 and it is trading for $0.99 and a 1% depeg from $1 is not unusual for stablecoins at times of intense market pressure, the parity is restored quickly and in the case of UST, it has been up to 16 hours.

Some critics say this only highlights UST as a liability for the wider crypto market as Luna Foundation Guard that backs UST, has $3.5 billion in BTC ready to sell as a last resort if it needs to defend UST’s stability and LFG reserves are in BTC 93%, LUNA 3.5%, and AVAX also 3.5%. The pressure on UST began to mount after the past few days saw a high volume of withdrawals from Terra’s Anchor Protocol where UST deposits earn investors 18.8% APY but it’s unclear what led to the withdrawals and can be the bearish turn in broader market. In what seems to be a domino effect, the UST liquidity pool on the curve shows an imbalance of around 67% at the time of writing, and usually, there’s a 50% split.

Curve is the main protocol for the stablecoin liquidity on ETH and highly prized for the deep liqudity which allows traders to swap the stablecoins like USDC and UST which is low slippage or price difference before and after the trade and since Curve’s central to DEFI with signs of irregularity in the pools that causes alarm. Tyler Reynolds is a web3 investor who follows stablecoins said that the concerns over Curve’s UST imbalance are quite overblown:

“But it’s kind of like a vending machine. It’s difficult to topple, but once it gets going, no one can stop it.”

Curve’s pool optimization researcher said that an imbalance like that is not really worrisome and explained that the bonding curves of the pools are designed like that they take on some imbalance before shifting the price too much. When UST dropped below $1 peg and the arbitragers traded LUNA For the discounted UST and generated profit which is a mechanism that helps maintain the peg to USD because each time traders buy it, the terra protocol removes UST from circulation.

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