TerraUSD (UST), an algorithmic stablecoin hosted by the Terra network and created by South Korea’s Terraform Labs, has once again lost its dollar peg after a wave of sell-offs hit the crypto market.
The stablecoin, which is supposed to maintain a value of USD 1 by creating and destroying supply through a swap with Terra’s governance and staking token LUNA, dropped to as low as USD 0.666831 at one point over the past 24 hours, according to CoinGecko.
UST’s depeg prompted the Luna Foundation Guard (LFG), a nonprofit organization dedicated to maintaining the stability of the UST peg, to interfere and lend out USD 1.5bn in Bitcoin and UST to defend the peg.
The action has ostensibly helped UST recover towards its peg. At 7:49 UTC, the 10th coin by market capitalization is trading at USD 0.894706, closer to its dollar peg.
While the situation is still ongoing, a number of conspiracy theories are floating around the crypto community, speculating what could have led to UST losing its peg.
As pointed out by Ran Neuner, co-founder and CEO of Onchain Capital, a blockchain investment fund and advisory service, one speculation is that the attack on UST was coordinated by major investment firm Citadel.
“This seems highly plausible given their anti- Bitcoin stance,” Neuner argued. “Also, when [Terra CEO Do Kwon]/LFG publicized they would protect the peg at certain level it was an invitation to attack. Wall Street are experts at this.”
Bitcoin trader Jacob Canfield even expanded on the theory that Citadel was the “culprit” of the UST depeg. He claimed that the investment firm borrowed a large amount of BTC, traded some for UST, and started dumping its BTC and UST after opening a short position.
Meanwhile, Larry Cermak, the director of research and analysis at The Block, said that Jump Capital, Alameda Ventures, and other VC firms might provide another USD 2bn to help bail out UST.
“Whether this rumor is true or not, it makes perfect sense for them to spread,” Cermak said. “The biggest question here is, even if they can get it to [USD] 1 by some miracle, the trust is irreversibly gone.”
However, some noted that even another USD 2bn would not be of much help given that UST’s market capitalization exceeds USD 16bn.
While there are different theories when it comes to how UST could have lost its peg, there seems to be some form of consensus that the so-called decentralized stablecoin is neither truly decentralized nor stable.
“No matter how this ends, I don’t want people to call UST decentralized again. Even the little collateral backing it has is intransparent and controlled by a single party,” said Hasu, research collaborator at crypto-focused investment firm Paradigm.
Some noted that decentralized finance (DeFi) at large is more of an experiment at this point, with the majority of projects trying to achieve true decentralization over time.
“I don’t even think Do Kwon thinks it’s fully decentralized right now. But its something we are all building towards,” one crypto user said.
In the latest update, the LFG shared on Monday that the organization withdrew around BTC 37,000 (1.18bn) to loan out to market makers.
“Very little of the recent clip has been spent but is currently being used to buy UST,” the LFG said, noting that this was the last clip.
Meanwhile, major crypto exchange Binance announced today that withdrawals for LUNA and UST tokens were temporarily suspended due to a high volume of pending withdrawal transactions, which is caused by network slowness and congestion, they said. Withdrawals will be reopened when the exchange deems the network to be stable and the volume of pending withdrawals has reduced.
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Do Kwon Wants to Fork LUNA’s Blockchain to Make ‘Terra Classic’
Under a plan proposed by Do Kwon, the current chain would be renamed Terra Classic. The new chain would ditch the UST stablecoin.
UPDATE May 16, 20222 from Decrypt
- UST and LUNA collapsed last week.
- Terra users will soon vote on whether to fork the blockchain.
Terra Network co-creator Do Kwon is trying to revive the fallen blockchain after its UST stablecoin de-pegged from the dollar and the LUNA governance token went from nearly $100 to fractions of a penny in a week.
His most recent proposal—after Terra users debated his previous plan to redistribute tokens and abandon UST stablecoin—is to split the blockchain into two in a similar manner to Ethereum’s fork from Ethereum Classic.
The proposal, made today and titled “Terra Ecosystem Revival Plan 2,” allows blockchain purists to keep the current, collapsed blockchain, which will henceforth be called “Terra Classic.” The token will be Luna Classic (LUNC).
The new chain will airdrop 1 billion Luna tokens between developers, UST holders, and those who held or staked Luna or its derivative projects before the price of the stablecoin de-pegged. The redistribution will include vesting schedules and token lockups for most of the LUNA, ostensibly to avoid a steep price decline as Terra determines how to move forward without UST at its center.https://imasdk.googleapis.com/js/core/bridge3.516.0_en.html#goog_2303139480 seconds of 32 minutes, 28 secondsVolume 90%
Crypto bloodbath! How low will the major coins go, and what about Terra and stablecoins? Decrypt’s Dan Roberts, Jeff Benson, Stacy Elliott and Jason Nelson will discuss the news and parse through what’s happened and what might happen next.Go to video page
Kwon’s latest proposal shares elements of the first plan, proposed on Friday, May 13. Most notably, there’s no UST stablecoin. Said Kwon: “Terra is more than $UST.”
In a tweet thread, Kwon shared that the plan came about due to “competing interests from varied stakeholders.” With no consensus to be had, developers and UST and LUNA holders can now choose to start fresh or stick with the collapsed chain, which remains paused as the community decides how to move forward.
UST stablecoin is an undercollateralized asset that’s supposed to keep parity with the U.S. dollar through a relationship with LUNA, Terra’s governance token. The price of the former is kept in check via a token-destruction method and arbitrage. If the price of UST falls below $1, traders can buy it up and swap it for a dollar’s worth of LUNA.
That system worked while LUNA’s price was mostly going up, making it a valuable asset to hold, but after a Terra lending protocol called Anchor began lowering interest rates from a spectacularly high 20%, there was less of a value proposition for LUNA. Traders cashed out and fled, propelling both UST and LUNA into a death spiral.
Kwon’s proposal to rewind the blockchain before a bad event is reminiscent of the Ethereum community’s split into two after a smart contract hack on “The DAO” in 2016.
The DAO—the initial decentralized autonomous organization—was a venture capital fund built on the Ethereum network. People could trade their ETH for DAO tokens, then use those tokens, akin to shares for voting rights in a company, to invest in Ethereum projects. The DAO raised over $150 million dollars in Ethereum, which was a considerable chunk of ETH’s market cap at the time.
But the code for The DAO’s smart contract had a flaw, resulting in a massive theft of investor’s funds. Community members debated what to do, ultimately landing on a fork of the blockchain that would split it into two from a point directly before the hack. A majority of users ultimately fell in line with the new camp, led by Ethereum creator Vitalik Buterin, which retained the Ethereum name. Others, many of whom argued that a blockchain should be immutable, stuck with the current chain, redubbed Ethereum Classic.
Similarly, Kwon tweeted, “Both chains will coexist.”
Terra community members have until May 18 to decide on Kwon’s proposal, which would occur on May 27.