UST: When the “Terra” is not so stable under your feet

On May 7, there was a small shock for UST (Terra USD) when it began to lose its peg to the US dollar (Peg). Four days later, UST reached a low of $ 0.26. The first price movement was the first sign of the imminent collapse of the Terra project, which many considered promising since its launch in April 2019.

However, this is not the first time that the UST has lost its dollar connection. The stablecoin was released at the end of 2020 and reached a price of $ 0.85 a month after launch. However, the global economic situation was very different then than it is today. In 2022, some new factors will be added, such as inflation problems and the volatility of traditional markets.

Stablecoins and their Incentives

One of the main incentives of the so-called stablecoins has always been that they remain stable against price fluctuations on the volatile crypto markets. Many stablecoins were a safer “store-of-value” when prices were falling again. What is currently happening, however, again raises the question of how useful stablecoins really are for this purpose.

An important point to consider is that other stablecoins have different mechanisms and achieve parity in a different way, such as UST. This can be done with fiat money or cryptocurrencies such as Ether or Bitcoin. This is not the case with UST, as it is an algorithmic stablecoin.

Can the algorithm of the TerraUSD (UST) keep the dollar connection?

UST maintains its US dollar peg using a mechanism where the number of Luna – Terra’s tokens – is increased or decreased as needed. In addition, tokens are “born”. So they are removed from circulation in order to keep the dollar connection under control. If the price of UST falls below the 1 US dollar mark, then UST will be burned in exchange for the equivalent value in Luna. If the value of UST rises above 1 US dollar, a certain amount of Luna is burned to generate more UST.

UST: The doubts

Many important people in the ecosystem expressed their concerns about the inefficiency of the mechanism. And about the possible risks in a bear market, and about the last purchase of Bitcoin as a reserve. This was done in case of an emergency, as it happened recently at the LFG (Luna Foundation Guard). Among the people who were alarmed is Adam Back. He shared his concerns directly with the founder of UST, Do Kwon, less than two months ago.

The massive sale of the ”backup Bitcoin” by the LFG has so far been of little use. However, it had a very strong impact on the price of Bitcoin, and in a negative way. Many Bitcoiners are annoyed by the Terra project. It is a clear example of the disaster that shitcoins can mean for the community in general. Currently, we are even observing changes in other stablecoins such as Tether, which are probably due to the same situation.

The promise that was supposed to lead us to the MOON has become a lesson in humility.

UST: The collapse

With the collapse of UST and Luna, crypto Twitter has caught fire and thousands of tweets have flooded the social network so far. The reactions are very different. From concern to astonishment to mockery of the crash.

Unfortunately, many investors were trapped in the above cryptocurrencies because they could not sell or exchange their tokens on time. As a result, they lost hundreds, thousands or even millions of US dollars.

However, we must not ignore the human side of the whole thing. Many of those who relied on the supposed stability of the UST are now in a precarious situation. On Twitter, there are cases when even suicide is considered. This is very worrying.

Some of us have experienced the bear markets of previous cycles such as 2018 – 2020. We know how tough the crypto market can be. Projects that do not have a solid basis then simply disappear. This was the case with all ICOs during the mentioned period.

The current situation feels like a deja vú. It takes us back to difficult times in which we gained valuable experience. Many of us have understood that caution is extremely important when you have the impulse to invest in an emerging cryptocurrency. At first glance, it may seem very innovative. But the promise to lead us to the moon?!

About the author

Lorena Ortiz is an entrepreneur and founding partner of the Bitcoin Embassy Bar in Mexico City. It was the first crypto-themed bar in Latin America. She also works as a consultant, workshop leader, lecturer and content creator on the topics of blockchain and Bitcoin.

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