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Whilst the whole cryptocurrency sector is tanking to lows not seen since last summer, few coins are having a worse time than TerraUSD (UST), the largest algorithmic stablecoin on the market.
UST, which is supposed to always be worth $1, briefly fell to $0.98 on May 7 following a number of major withdrawals from decentralised finance (DeFi) protocols on the Terra network.
The situation worsened on May 9 when UST’s price plummeted to $0.68 amidst a wider market selloff that placed significant strain on the stablecoin.
UST is meant to function in unison with LUNA, its sister token, through an algorithmic harmony of mint and burn mechanics that ensure $1 worth of UST can always be traded for $1 worth of LUNA.
For this harmony to be maintained, LUNA needs to hold a higher market cap than UST so that $1 of UST can always be sold for $1 of LUNA.
Whilst this has typically been the case, LUNA’s price has declined by 60% over the past week due to these ongoing issues. As a result, UST now has a market cap more than $4 billion higher than LUNA.
Essentially, if every holder of UST decided to sell off their stablecoins for LUNA, the whole system would come crashing down.
This recent streak of poor fortune isn’t the first time Terra has become “depegged” from the dollar, however, it coming just days after Terraform Labs doubled its Bitcoin reserves up to $3 billion has been particularly damning.
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