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A panoramic view of Terra – LUNA and UST after the terrible crash, causing the market to shake violently

Since May 8 until now, the market has had a very deep crash, leading to stable coins like USDT, BUSD and USDC also losing their original $1 peg. The original cause of the incident was that the stablecoin UST was de-peg 1 USD. This leads to Terra’s monetary policy being activated, which is activated to subsidize the UST’s price back to $1.

However, starting at 0:00 on May 8 when the UST price started to drop from $1 and fell to as low as $0.9857 on the same day due to the sudden withdrawal of UST on Anchor about more than 50% of the UST value at that time and immediately they were sold off at 3pool on Curve and Binance with a large amount of UST leading to many investors panicking and selling off UST subsequently, causing the value of UST to plummet to $0.6x on May 10.

A panoramic view of Terra - LUNA and UST after the terrible crash
A panoramic view of Terra – LUNA and UST after the terrible crash

In this article, we will slightly change the wording like de-peg ($1 destabilization) to negative peg (price under $1), positive peg (price over $1), this will make it easier for most of you to understand.

Accordingly, in this article, we will find out if LUNA and UST will be able to return to their original position as well as Terra can successfully defend UST back to the original peg ($1) or not!

Impact of UST’s loss of peg on the whole market

Since May 8, Terra’s stablecoin did not hold the peg $1, successive events followed, the next move by LFG and Terra organizations led to Bitcoin in particular and the entire crypto market in general. entered a “whirlpool of death“.

The first incident was due to the move of LFG, which withdrew all BTC in its reserve in just one day with 42,530 BTC for the purpose of subsidizing stablecoin UST.

LFG withdrew all BTC in its reserve in just one day with 42,530 BTC for the purpose of subsidizing stablecoin UST.
LFG withdrew all BTC in its reserve in just one day with 42,530 BTC for the purpose of subsidizing stablecoin UST.

According to Terra’s protocol, in addition to Terra mint LUNA being used to subsidize USTs with a price of less than 1$, then Terra will burn stablecoins to push the UST price to balance with peg $1 before.

So it will not be strange that the reserve fund of the LFG organization will be low when Terra has not started to announce the UST subsidy by minting LUNA to buy UST.

That means Terra will proceed to use the BTC in LFG’s reserve to buy UST if UST loses peg $1 before LUNA is minted, this issue was previously mentioned by Do Kwon – Founder of Terra.

Terra will proceed to use the BTC in LFG's reserve to buy UST if UST loses peg $1 before LUNA is minted
Terra will proceed to use the BTC in LFG’s reserve to buy UST if UST loses peg $1 before LUNA is minted

The LFG has lent the above BTC to Terra’s MM team so that they can subsidize UST. It is not clear if this BTC has been used up yet, but then Terra announced that it will mint a large amount of LUNA to support the UST price.

Before the negative UST peg happened, the crypto market was also in a bear market.

Therefore, the effect of LFG allowing Terra to use up to 42,530 BTC to conduct subsidies triggered a sell-off across the entire market, including BTC sold to subsidize the UST causing BTC to plummet and followed by the cryptocurrency market.

The reason why the price of LUNA fell deeply, divided by 14 thousand times

The basic reason is that starting from the action of Do Kwon withdrawing USD 150 million of liquidity from 3Pool-UST on the Curve platform, the liquidity on 3Pool is still quite low. The purpose of this move is to have enough liquidity to prepare for a new period of 4pool.

The basic reason is that starting from the action of Do Kwon withdrawing USD 150 million of liquidity from 3Pool-UST
The basic reason is that starting from the action of Do Kwon withdrawing USD 150 million of liquidity from 3Pool-UST

Therefore, there may be some bad force attacking this pool by selling a large amount of UST for the UST/USDT pair leading to the UST dropping peg. But can’t imagine why Terra didn’t implement their monetary policy immediately to subsidize the UST/USDT pair to balance the price.

Terra’s next move (Do Kwon) continued to withdraw another 100 million UST from the 3Pool-UST pool, to rebalance the exchange rate, resulting in a smaller UST pool.

Terra's next move (Do Kwon) continued to withdraw another 100 million UST from the 3Pool-UST pool
Terra’s next move (Do Kwon) continued to withdraw another 100 million UST from the 3Pool-UST pool

To summarize the case in a more understandable way is to prepare for 4Pool as well as temporarily reduce the supply of UST-> UST rate will be low due to increasing supply -> LFG has to withdraw UST from the pool to reduce the number of tokens -> help the exchange rate stabilize again.

However, accordingly, the liquidity in the pool becomes thinner, thereby making it easier to negative peg if a large amount of UST is released into the pool.

Terra minted LUNA continuously, to try to bring UST to $ 1, the number of LUNA minted continuously within just 1 day has increased to more than 44 times since the previous circulating supply of 337M LUNA.

As of now, the circulating supply of LUNA is reaching 15 billion
As of now, the circulating supply of LUNA is reaching 15 billion

As of now, the circulating supply of LUNA is reaching 15 billion. With such an exponential continuous minting of LUNA, it’s a concern for LUNA holders.

Terra's price has been greatly reduced
Terra’s price has been greatly reduced

LFG’s reserve fund was exhausted of BTC, so LUNAs began to be minted continuously to support the UST price uncontrollably.

The current UST price has not returned to the original $ peg $ 1 (about $ 0.6 at present), with a total circulating supply of 15 billion currently, according to Terra’s current algorithm, LUNA will continue to be minted continuously. continue in the near future with the aim of bringing UST to a price of $1.

The selling pressure from UST is no less, when investors have lost confidence in UST, through the view from the amount of money being withdrawn continuously on the Anchor platform, about 11 billion UST in just a few days from the 3pool event of the UST.

Number of USTs remaining on the Anchor platform:

Number of USTs remaining on the Anchor platform
Number of USTs remaining on the Anchor platform

Can Peg UST return to 1 or not?

At this point, LUNA has split more than 14,000 times compared to a few days before. UST still can’t get back to $1 value. However, whether LUNA and UST can return to their original positions, you and I will continue to find the answer below.

The Decline of LUNA

The fact that LUNA is still continuing to plummet while UST has made some progress in regaining its $1 peg can be known to the efforts of Do Kwon, who has outlined a plan to attempt to restore it. closes on 11/05.

Kwon endorsed a community proposal to quadruple the amount of LUNA mined per day to help UST holders monetize, easing selling pressure.

The proposal acknowledges that minting LUNA will increase selling pressure on LUNA, but the number of USTs will be burned significantly, reducing the selling pressure of UST as the amount of UST is withdrawn on the private Anchor platform and the entire UST are generally held by investors (they may no longer have confidence).

What opportunities for UST

After a flurry of bad news for UST that resulted in the loss of $1 peg and still no return to the starting peg, here’s a recap of the recent UST news:

  • Withdraw UST liquidity from 3Pool-UST
  • UST is attacked by peg $1 for the first time -> price goes back to 0.995
  • Terra withdraws further UST liquidity from 3Pool-UST to balance the price of UST
  • Pool UST on 3Pool-UST is thinner than before
  • UST gets peg $1 making peg deep negative by short selling UST
  • LFG lends Terra BTC to sell -> support UST
  • Terra raised funds from organizations to subsidize UST.
  • UST peg attack conspiracy theory played out by Blackrock & Citadel
  • The UST’s de-peg (negative peg) price imbalance has also drawn attention from regulators.

In it, during a hearing on May 10, US Treasury Secretary Janet Yellen said “The fact that UST is managed and used on Terra illustrates that stablecoins are a rapidly evolving and viable product. big risks faster and faster”.

US Treasury Secretary Janet Yellen said about Terra
US Treasury Secretary Janet Yellen said about Terra

Minister Yellen also said that stablecoins need to be regulated in 2022 by financial regulators.

Accordingly, the known stablecoin UST is not currently under the control of a financial regulator, so Terra’s UST price balancing mechanism has had a profound effect on the entire Terra ecosystem. and LUNA.

Does Terra really “save” UST?

As you know, stablecoins are known to be a safe haven in the crypto market, but is the UST still suitable for use and can return to its original position? it doesn’t really depend on a large circulating supply of UST or anything.

Stablecoins have lost peg $1. Therefore, at the moment, according to Terra’s mechanism, the platform will continue to mint LUNA without control of the supply, in order to return UST to the original position of a stablecoin.

Because Do Kwon – Founder of Terra posted the next tweet, this is a move to say that Terra accepts everything to achieve the main goal -> restores UST to $ 1 -> Then changes the mechanism of UST when mint, mortgage.

Do Kwon - Founder of Terra said that Terra accepts everything to achieve the main goal -> restores UST to $ 1
Do Kwon – Founder of Terra said that Terra accepts everything to achieve the main goal -> restores UST to $ 1

With the large discharge from LUNA, investors still have the need to catch dips, although not much, but not less, LUNA is still continuously minted to subsidize UST.

However, there is still no strong 3rd party support for Terra to restore the stablecoin that the LFG’s reserve assets are now empty of available BTC.

Therefore, the amount of LUNA will be continuously minted to subsidize UST, which is equivalent to the UST price will be able to return to its original position with the determination of Do Kwon – Founder of Terra.

Summary

If the collapse of both UST and LUNA happens quickly and both become worthless, it is possible that the entire cryptocurrency market will fall into a state of extreme chaos.

Because of that, that is the basic reason and also what the major exchanges currently do not want that to happen (Binance, Huobi, …) have yet to delist the spot pairs of LUNA – UST.

In order to reduce inflation for the UST, the Anchor Protocol community has submitted a proposal to reduce the minimum interest rate to 3.5% and the maximum deposit rate to 5.5%. The whole market is still watching for new moves from Terra for Luna’s deep dump. Do they have any other way to save UST despite accepting infinite mint Luna,

Although the events of LUNA and UST have caused many brothers to panic about the stability and safety of stablecoins, please stay calm, and manage your capital well during the time in the market, because there is money left. there’s still a chance.

Latest Update:

On the morning of May 13, the Binance exchange announced about delisting (deleting the trading list) of LUNA’s trading pairs including Margin and Trading Spot, the policy has been implemented since 7:40 AM (GMT+7)

Binance exchange announced about delisting of LUNA's trading pairs including Margin and Trading Spot on May 13, 2022.
Binance exchange announced about delisting of LUNA’s trading pairs including Margin and Trading Spot on May 13, 2022.