• UST Issues Undermine Algorithmic Stablecoin Trust

  • Terra’s UST has been the focus of much interest since its launch, as the crypto industry remains divided on the initiative’s viability. With recent crypto price volatility and the stablecoin’s loss of its peg to the dollar, The Block’s Research Vice President Larry Cermak encouraged Terra to collateralize the stablecoin, fearing that they would lose investor faith.

    A Watershed Moment for Stablecoin Decentralization?

    Terra’s UST has experienced significant price changes as a result of the general uncertainty and reduction in prices in the broader crypto market and Bitcoin, its primary reserve currency. As a result, the UST stablecoin’s value fell to as low as $0.6 on Monday. Efforts from the Luna Foundation Guard (LFG) and Terraform Labs have yet to pay off as the stablecoin has failed to regain its losses, trading presently around $0.45, more than 50% down in the previous 24 hours.

    Meanwhile, observers remain dubious of the LFG’s actions and doubt that the UST can restore parity with the dollar. Such sentiments were shared by the Block’s Larry Cermak in a tweet on Tuesday, stressing that even if parity with the dollar is restored, investor faith is gone. Cermak wrote in his post:

    “There is a rumor spreading about Jump, Alameda, etc. providing another $2B to ‘bail out’ UST. Whether this rumor is true or not, it makes perfect sense for them to spread. The biggest question here is, even if they can get it to $1 by some miracle, the trust is irreversibly gone.”

    In a subsequent tweet, the researcher encouraged the LFG to reconsider their plan to back the stablecoin with Bitcoin by collateralizing. Cermak stated, “I personally think the only way to save it now is by fully (or potentially very close to fully) collateralizing. Otherwise, I don’t see it ever being used again.”

    It should be noted that UST is no longer the sole mainstream algorithmic stablecoin. Tron’s USDD is just getting started, while Cardano’s Djed and IOST’s stablecoin rollouts are in the pipeline. The success or failure of Terra’s UST will most certainly influence the method taken by other developers, as well as the broader market perception of algorithmic stable coins.

    Terra’s Efforts to Keep The Peg

    Following a large dump of the stablecoin over the weekend, the LFG has been working hard to reestablish the peg. The foundation announced plans to lend $1.5 billion in BTC and UST to market makers, increasing demand for the UST stablecoin and helping to drive up the price.

    The LFG announced yesterday that they had transferred an extra 28,205.5 Bitcoin loan to market makers, which was also used to purchase more UST. The LFG’s Bitcoin address is currently empty.

    The network’s native token, LUNA, has suffered a significant damage as a result of all of this. LUNA is now trading around $1.61, having dropped by 95% in the past 24 hours and 98% in the last seven days.

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