TerraStablecoins

Terra (LUNA) shed half of its value in the last 24 hours, causing the TerraUSD stablecoin to lose its $1 peg.

The bloodbath – which comes amid a larger cryptocurrency market freefall – was caused by a large sell-off of the LUNA token.

Terra, described as a programmable money for the internet, was already falling towards the end of the weekend but entered a huge tailspin on Monday and dropped below $32 at the time of writing on Tuesday (7am UK). 

More than $10 billion of the tokens have been traded in the last 24 hours, compared with just $2bn apiece for Polkadot (DOT) and Shiba Inu (SHIB), the coins closest in value in the market cap valuation table.

In the last two weeks its market cap has dropped below that of Cardano (ADA), Avalanche (AVAX), Dogecoin (DOGE) and DOT. 

Observers questioned whether its sister stablecoin TerraUSD (UST) was fit for purpose, given that it is backed by LUNA reserves yet has a market cap of $16bn, $5bn more than LUNA.

Stablecoins, which allow investors to cash out of digital currencies without leaving the crypto ecosystem – effectively a place to shelter before reinvesting or exiting into fiat currencies such as the US dollar – seek to maintain a ‘peg’ value of $1, usually by holding the equivalent value of the currency in traditional assets. 

However UST, the third-largest stablecoin by market cap, relies upon LUNA and Bitcoin (BTC) reserves to maintain its peg. It dropped as low as 68 cents on Monday and currently stands at 89c.

The Luna Foundation Guard (LFG), which is in charge of ensuring UST maintains its peg to the dollar, deployed $1.5bn worth of BTC on Monday to add liquidity to the ecosystem. 

LFG also loaned out coins to trading firms and 750 million UST tokens to accumulate BTC.

Do Kwon, founder of Terraform Labs – which powers the Terra blockchain – tweeted: “Deploying more capital – Steady lads.”