Key Metrics Showing Terra’s UST Depeg
UST is a Terra ecosystem native algorithmic stable coin pegged to the US Dollar. It uses a dynamic stabilizing mechanism with LUNA, the validating asset for the Terra blockchain. For every UST minted on Terra’s platform an equivalent of $1 US Dollar worth of Luna is burned for each token. In this way, in the case of a depeg traders would be incentivized to burn UST in order to restore the peg. This article overviews key metrics affected by the UST recent depegged.
Fear, uncertainty and doubt started to arise when LUNA’s market cap dropped below the one of UST. This raises the question of whether the stable coin had sufficient backing for users who wanted to redeem their tokens. In this scenario UST holders redeem their tokens for LUNA in order to sell it which leads to a decrease in price.
Macroeconomics tensions, plus down pressure selling of the token led to the depeg shown on the graph above. UST dropped to $0.64 on Monday afternoon after recovering to $0.91 on Tuesday morning. During this time Terraform Labs announced the lending of their previously accumulated $1.5 billion worth of Bitcoin warchest to professional market makers with the purpose of restoring the peg.
Algorithmic stablecoins requiere demand and utility in order to maintain their peg. Anchor, a Terra native borrowing and lending protocol offers 19.5% yield for deposits on UST. This has led historically to over 70% of UST’s circulating supply to be deposited onto the protocol. This also led to UST being Anchor’s main deposit, and made the protocol susceptible to the FUD experienced by the recent market. Investors wanting to secure their positions withdrew their deposits, hence a 65% reduction on the protocol’s TVL.
Anchor’s TVL reduction signals a reduction in Terra’s economic activity. Users withdrawing from Anchor are faced with two potential options. First one is to take the financial loss of the depegged UST and exchange it into a different asset. Secondly is to use Terra’s mechanism to convert each UST for $1 US dollar worth of $LUNA. The second option described potentially leads to a sell off of the LUNA token, spiking unseen trading volumes and plummeting price.
Massive selling pressure on the LUNA token triggered record spot trading volume highs, reaching $6 billion on Tuesday May 10th. As the depeg continues, LUNA’s circulating supply is increased by the burning of UST. As a consequence price continues to decrease into all time lows.
Do Kwon, Terraform Labs founder, announced a proposal to restore the depeg. Since then UST’s depeg has recovered to $0.60 levels from all time lows of $0.30. LUNA token price currently trades at $2.40 which represents a 97% drawdown in the last 7 days. This marks a new episode for the challenging algorithmic stable coins market.
