The TerraUSD (UST) token crashed to $0.61 on Monday as it broke away massively from the $1 peg even as the broader crypto market bled amid the worst selloff of 2022.
The UST has since rebounded amid a series of moves to reinstate the peg by the Luna Foundation Guard, the organization that currently oversees the UST treasury.
As the algorithmic token fell, the LFG deployed its $2.2 billion in BTC reserves – a move that likely helped stem the rot – with the price of BTC briefly falling below $30,000 and LUNA plunging further 50% down to around $28.
UST is vulnerable as LUNA trades 50% in 24 hours
Tim Frost, Founder and CEO of Yield App, says the crash indicates vulnerabilities faced by decentralized stablecoins.
“A rough start to the week for the entire cryptocurrency market has brought one of its latest stars to its knees: UST. Just when we thought a decentralized algorithmic stablecoin had finally reached the level and proved all doubters wrong, it slipped 40% below its USD peg.,” Frost told CoinJournal via email.
At the time of writing, UST is back to around $0.90 as BTC sees a slight recovery above $31.5,000 and Terra (LUNA) cuts some of the losses to trade currently around $30. The LUNA/USD pair is however still down 50%.
Frost thinks further selling around the DeFi token could mean LFG’s measures are “unlikely to prove a long-term solution.” Greater incoming pressure on UST is therefore possible.
“More importantly, it highlights just how vulnerable decentralized stablecoins that rely on theoretical pegs instead of cash are in for a good old-fashioned banking race. There’s not much anyone can do when investors start heading for the door in droves, other than join the rush and take a huge loss.added the head of Yield App.
On the overall outlook for the crypto market, Frost says “there is no longer any doubt that we are in the midst of the most aggressive bear market since 2018.”