The crypto market is in a rut today, with DeFi platforms falling out of favor and investors cycling out of digital money in favor of safer investments. Some currencies are being hit harder than others, including Terra (LUNA-USD). The LUNA crypto is suffering especially today, rocked by an issue that has arisen in its sibling token, the stablecoin TerraUSD (UST-USD).
Until May, Terra had been enjoying a pretty decent year, performance-wise. It could not be saved by the market-wide volatility throughout January. However, it has seen continuous and sustained growth throughout the end of Q1 and the beginning of Q2. This comes in large part thanks to TerraUSD’s unprecedented growth throughout this period. With a market capitalization of $18.5 billion, the stablecoin is only $500 million behind Terra now. It even passed Binance USD (BUSD-USD) recently to become the third-largest stablecoin in the world.
It appears that the growth phase could be coming to an end, though. The LUNA crypto is getting hit with a one-two punch that’s inflicting suffering on the coin today. First is the bearishness that is washing over the entire market. But, there’s also more woes with UST that are helping to suppress Terra prices.
On an already bearish day, Terra couldn’t be coming out with worse news. Over the weekend, the UST stablecoin was knocked down off its peg, sending the ecosystem and its developers into overdrive in an effort to right the price fluctuation. Already, the Terra (LUNA) crypto is bearing losses of 13%.
Terra (LUNA) Crypto Suffers as UST Loses $1 Peg for Second Time in 2022
It’s extremely important that a stablecoin retain its peg. Slippage of even a fraction of a percent can have detrimental effects on users’ income. So with news that UST is dropping down to 98 cents, the network is quickly springing into action to get prices back up.
One thing that sets UST apart from other stablecoins is that it is an algorithmic stablecoin. This means the network uses automated mathematics to constantly adjust the UST supply, keeping prices at $1. To achieve this algorithmic equilibrium, the supply of UST and LUNA are linked. Adjusting the supply of one crypto to be bigger makes the other crypto’s supply smaller, and vice versa.
This model came under scrutiny earlier in the year when UST was knocked from its $1 peg. After some drama involving a DeFi platform called Wonderland, a massive outflow of users was able to knock the token down significantly in price. It took hours before prices returned to normalcy. Since it is an algorithmic token, UST doesn’t need underlying reserves. But, in the wake of the news, critics commented that a reserve for UST could have helped.
New Bitcoin Reserve Helps Luna Foundation Guard Quickly Respond to UST Woes
The Luna Foundation Guard, which oversees Terra development, is in the midst of a massive Bitcoin (BTC-USD) buying campaign to underlie the currency. It is actually the news of this buying spree that sent Terra prices to an all-time high earlier in the spring.
In similar fashion to the last de-pegging, an outflow of users from a DeFi protocol called Anchor Protocol (ANC-USD) sent UST prices plunging. More withdrawals from Curve (CRV-USD) exacerbated the situation, as did multi-million-dollar UST dumps on Ethereum (ETH-USD).
With a new Bitcoin reserve at its side, it seems that the Luna Foundation Guard is quickly remedying the situation. The group is lending $750 million of its BTC reserve to trading firms in an effort to preserve the UST peg. Moreover, it is loaning out $750 million in UST to continue its Bitcoin buying campaign.
These efforts are proving effective at treating the stablecoin. As of right now, the token is back above 99 cents and trading with more normalcy. However, the LUNA crypto is still suffering its own losses. Terra prices are down 13% in the wake of the news.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.