LUNA Price Drops Over 56% in Last 24 hours, UST Loses Dollar Peg for 2nd time in 48 hours

Key Takeaways

  • LUNA has seen a price drop of more than 56% in the last 24 hours, according to the data available from CoinmarketCap.
  • TerraUSD (UST) has also lost its dollar Peg for 2nd time in 48 hours, falling to as low as $0.68 according to the data available from CoinmarketCap.

Below is a quick overview of both these projects.

Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems. According to its white paper, Terra combines the price stability and wide adoption of fiat currencies with the censorship-resistance of Bitcoin (BTC) and offers fast and affordable settlements.

Terra’s native token, LUNA, is used to stabilize the price of the protocol’s stablecoins. On the other hand, TerraUSD (UST) is the decentralized and algorithmic stablecoin of the Terra blockchain.

Price Analysis of Terra(LUNA)

Given below is the LUNA to USD Chart of the last 24 hours. We can see the decrease in the price of LUNA easily. The price of 1 LUNA was equivalent to 64.3 USD on 9th May 2022, but if we talk about the present situation, i.e., 10th May 2022, 1 LUNA is equivalent to 28.03 USD. LUNA has lost 56.41% of its value over the last 24 hours. For this data, we would like to credit CoinmarketCap.

Price Crash Of Luna
Price Crash of LUNA

Price Analysis of TerraUSD (UST)

Given below is the UST to USD Chart of the last 24 hours. We can see the decrease in the price of UST easily. The price of 1 UST was almost equal to 1 USD on 9th May 2022, but if we talk about the present situation, i.e., 10th May 2022, 1 UST is equivalent to 0.68 USD. UST has lost 32% of its value over the last 24 hours. For this data, we would like to credit CoinmarketCap.

Price Crash Of Ust
Price Crash of UST

What is the Reason Behind this Price Drop?

According to Mudit Gupta, Terraform Labs removed $150m of UST liquidity from Curve yesterday. One minute later, a freshly funded address bridged $84m of UST to Ethereum, which initiated bridging before they removed liquidity. 4 minutes later, it dumped the UST and triggered a sell-off. Here is the freshly funded address which started dumping UST: https://etherscan.io/tx/0xaa23df48c53f221d0e8ac60ffc9e69340f3e8948fcdc936f3aee9c887d802abb

After that, Terraform Labs removed another $100m of UST liquidity from Curve. As UST started to de-peg, an unknown actor started dumping ETH and buying UST. As UST was trading below peg, they made a profit while avoiding bad optics around dumping Ether. Here is the address of an unknown actor who started dumping Ether for UST: https://etherscan.io/address/0x6b671b51258db0316dd89bc0075d6113488be5e8.

Here are the addresses of transactions where Terraform Labs is removing liquidity:

  1. https://etherscan.io/tx/0x18bd477f9beeff22b2ad0c6d48a9c0f02b542049789f0638f5ec50365f1d1de7
  2. https://etherscan.io/tx/0xd9539185932804c05e64630bd56180807b6b2c10266b6e964ca73b11bf418016

Also, according to unusual_whales, Luna has emptied their BTC reserve wallet at $1.4 billion. As a result, bitcoin was down at $31,000, Terra(LUNA) was down by 32%, and TerraUSD(UST) was down at $0.95.

According to official confirmation of Luna Foundation Guard, the LFG Council has voted to execute the following:

  1. Loan $750M worth of BTC to OTC trading firms to help protect the UST peg.
  2. Loan 750M UST to accumulate BTC as market conditions normalize.

The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize. As per the LFG’s mandate, the LFG will proactively defend the stability of the UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.

According to Do Kwon, LFG is not trying to exit its bitcoin position. The goal is to have this capital in the hands of a professional market maker such that:

  1. Buy UST if price < peg
  2. Buy BTC if price >= peg

This will significantly strengthen the liquidity around the UST peg. While buys and sells of UST are not in meaningful directional now, the team felt it was valuable to have capital ready to be deployed in the current market. As markets recover, they plan to have the loan redeemed to them in BTC, increasing the size of their total reserves.

The LFG council currently consists of Kanav KariyaNicholas PlatiasJonathan CarasRemi TetotTai PanichJosé Maria Macedo, and Do Kwon, and they have made this decision via a unanimous vote of the council.

Is Terra(LUNA) and TerraUSD(UST) really decentralized?

Centralization Of Luna
Centralization of LUNA

We would like to credit Duo Nine for this information, and our readers can check out his Twitter thread to know more.

A few council members took the above decision, which has made Terra more centralized. But as we can see in the above screenshot, the team is working on a decentralized mechanism. Terra Luna is not decentralized unless 130 validators qualify as such. On the other hand, ETH has millions of validators, but LUNA has only 130 validators.

UST is centrally controlled and managed, including everything from minting to burning and USD peg management. Terra insiders and its Foundation minted all Luna for free. Then, they proceeded to use that to mint UST. Then they swap UST for anything else. The more the Terra ecosystem grows, the more options they have to do so.

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Yash Kamal Chaturvedi

Btech Computer Science, Maharshi Dayanand University, Rohtak (2023)