Terra’s stablecoin, TerraUSD (UST), lost its peg to $1 as of yesterday. Especially yesterday, UST fell to $0.98. After that, the Terra LFG non-profit foundation plans to provide a $1.5 billion loan to market makers to maintain UST parity and return UST to $1.
UST loses parity
Luna Foundation Guard plans to repay this debt with Bitcoin (BTC) and TerraUSD (UST) worth $750 million each. LFG aims to achieve dollar stabilization of UST after this debt. However, experts also believe that this move could lead to LFG selling its BTC reserves.
At the time of writing this article, UST is trading at around $0.995, which is 0.17% more than in the last 24 hours. In other words, after yesterday’s fall, UST seems to have recovered a little more and can restore its stability with such a movement of LFG. Experts attribute this fall to the general decline of the market and argue that, in addition to bitcoin, the fall of LUNA is also effective for UST.
Terra’s own token, LUNA, actually supports UST, which works with a dual token mechanism. If UST is trading below the fixed price, the arbiters can burn LUNA by $1, reducing the supply, helping this stable coin get closer to its $1 target. However, experts stress that excessive burning of LUNA to stabilize UST could be a potential death spiral for LUNA.
For these reasons, the Terra Foundation has started to create Bitcoin (BTC) reserves as an alternative. LFG is getting closer and closer to its goal of accumulating BTC of $10 billion. In this process, Terra aims to reduce the dependence of the mechanism on LUNA and plans to create a new payment mechanism on the network.
Despite all the precautions, Terra finds a solution in the allocation of $1.5 billion in LFG capital, since it has not yet implemented a payment mechanism in the bitcoin blockchain. Experts, on the other hand, say that lending $750 million worth of BTC could create pressure from sellers and push the market even further. UST, on the other hand, is not doing this for the first time, and it looks like it dropped to $0.96 in May 2021. Therefore, according to experts, for about a year there has been concern in the industry about the parity of the UST, and this puts a lot of pressure on Terra.