Stablecoin that’s supposed to be worth $1 plunges to around 40 cents

May 11, 2022, 9:02 AM UTC

TerraUSD, the controversial algorithmic stablecoin, slumped on Wednesday as crypto markets await a rescue led by primary backer Do Kwon.  

The token fell further from its intended 1-to-1 peg to the U.S. dollar to trade at around 44 cents at 9:30 a.m. in London, data compiled by Bloomberg show. Luna, a coin that’s part of the peg mechanism for TerraUSD, tumbled 84% over the past 24 hours, according to CoinMarketCap. 

Broader crypto markets showed few signs of getting caught up in the turmoil, with stablecoins like Tether holding their pegs and major tokens including Bitcoin and Ether trading little changed. TerraUSD’s market value now stands at $6.5 billion, CoinMarketCap data show. 

TerraUSD, or UST, is the biggest algorithmic stablecoin by market value. Over the weekend, the token lost its intended peg to the U.S. dollar, falling to about 99 cents. A wave of selling followed, and by Monday evening UST had hit 60 cents. On Tuesday, following an earlier tweet from Kwon that he was “close to announcing a recovery plan,” the token rallied to around 94 cents.  

Unlike conventional stablecoins like Tether’s USDT or Circle’s USDC that are backed by real-world highly liquid cash equivalents or dollars, algorithmic tokens are designed to maintain their peg (and investor confidence) through a combination of mathematical equations and active trading. In the case of UST, investors can exchange one unit of the token, no matter what price it’s currently trading at, for $1 worth of Luna. The embedded arbitrage trade helps keep UST at or close to $1, or so the theory goes. 

Fadi Aboualfa, head of research at crypto custodian Copper, said in an email that TerraUSD’s complex approach to algorithmic management means a drop was “destined to happen in any significant downtrend.”

“The simplest protocols with a clearly defined economic structure will win,” Aboualfa wrote. 

Kwon and a group of investors known as the Luna Foundation Guard had previously issued $1.5 billion in loans denominated in both Bitcoin and UST to external firms in an attempt to support the peg.

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