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TerraUSDT (UST) is (though “was” might be better)an algorithmic stablecoin whose stability mechanism stemmed from the promise of a payout with LUNA. Having traders mint and burn tokens as needed to ensure the stability of UST out of trust in the Terra blockchain.
However, between the 9th and 10th of May, the UST’s price crashed, falling below ten cents and completely losing its peg. Before its decoupling from USD, UST was the third-largest stablecoin by market cap. This makes the collapse one of the most concerning developments in crypto and something that everyone interesting in blockchain needs to understand.
Why did UST, which has been so stable for so long, decouple? What are the consequences?
Algorithmic Stablecoins Are Different from Other Stablecoins
Before analyzing UST’s decoupling, let’s look at how it differs from the legal and over-collateralized stablecoins.
Algorithmic stablecoins do not require any collateral. They instead adjust the number of tokens held by users through currency price fluctuations. Fiat and over-collateralized coins require collateral. For example, Tether (USDT) holds collateral in fiat USD. Hyper-collateralized coins use BTC and ETH as collateral. Because of the high price volatility of BTC and ETH, the collateral must be over-collateralized.
UST is a stablecoin anchored to $1, but without sufficient collateral assets. Once the token price fell below $1, its whole ecosystem, including LUNA and the Anchor protocol, were dragged down with it.
UST’s Decoupling: Before and After
UST token price stable at $1
Footprint Analytics data shows that UST was stable at around $1 for about 1 year, from May 27, 2021 to May 8, 2022. During this time, LUNA’s price has seen 2 major increases, peaking at $116.32.
Footprint Analytics – Token Price: UST vs LUNA
The stability of UST at the $1 anchor was the driving force behind the growth of Terra’s…
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