How a crypto bank run in Terra’s UST could rock cryptocurrencies

Following a massive shedding of cryptocurrencies and other risky assets by investors, the stablecoin TerraUSD (UST) “de-pegged” from its essential $1 value this week, while its sister token Luna dropped 79% from $82 to $17.2 over five days.

In a fight to save both cryptocurrencies, the Luna Foundation Guard (LFG), a nonprofit supporting the Terra blockchain, has deployed $1.5 billion in bitcoin and UST loans.

Whether the stablecoin fully recovers or collapses, the ongoing battle could have a lasting impact on the crypto market.

“Besides the obvious, real money and people’s livelihoods are at stake, these types of crypto monetary experiments are important for the evolution of the space,” John Kramer, head of over-the-counter and DeFi trading with GSR, told Yahoo Finance. “Whether UST ultimately recovers or collapses, it motivates others to build more robust stablecoin alternatives.”

What happened?

On Saturday, the LFG began removing approximately $150 million in UST from the decentralized exchange Curve. The move unintentionally sparked a multi-million dollar sale of the stablecoin, according to public comments from Do Kwon, the 30-year old co-founder and creator of Terraform Labs and member of the LFG.

Minutes after LFG removed its funds, an unknown address sold $84 million in UST on crypto exchange Binance. Demand for UST became “off balance” on Curve, according to Lily Francus, a director of quantitative trading strategy with Moody’s, spurring more holders to sell for better-yielding stablecoins.

By midday Monday, UST’s value had fallen 5% to 95 cents per coin — not bad relative to bitcoin which lost 11% — but far more significant given how past stablecoins have plunged towards collapse in similar “de-pegging” events, Francus told Yahoo Finance.

By Monday evening, UST had plummeted 30% from 99 cents to 69 cents. Its sister token, Luna — a crypto once among the top 10 by market capitalization — fell from $60 to $25. It has since tumbled to $17 per unit, but that’s still a 55% drop over the past 24 hours.

Ryan Clemens, an assistant professor of Business Law and regulation at the University of Calgary, isn’t surprised by the turn of events.

“Algorithmic stablecoins are based on confidence and trust in the economic incentives of the stablecoin issuer's underlying ecosystem. Once that trust and investor demand evaporates, they quickly fail in a death spiral,” Clemens wrote in an email to Yahoo Finance. “And we saw that.”

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