Macauley Peterson

<div id="highlights-block_62794b4f4b991" class="highlights">
 <ul>
 <li>High-volumes sales of UST have pushed the stablecoin below peg for several hours</li>
 <li>The LFG will loan $750 million from its BTC reserves to market makers for stability operations</li>
 </ul>
 
</div>



Stablecoins pegged to the US dollar have just one job: hew as closely as possible to $1.



Any meaningful deviation from the one-to-one peg threatens to undermine the confidence of stablecoin holders.&nbsp;



That was the case with Terra’s UST stablecoin over the weekend, as it experienced its most significant stability test since May 2021, briefly dropping to around 98 cents on major decentralized exchange Curve Finance. Today, the Luna Foundation Guard (LFG) — tasked with defending the peg and armed with $2.6 billion in bitcoin — is manning the ramparts.



UST is an algorithmic stablecoin whose supply expands by burning LUNA, the native asset of Terra. As demand for UST pushes the price above a dollar, LUNA is burned to mint more, restoring the peg. Over the past 6 months, the market cap of UST has skyrocketed from just under $3 billion to more than $18 billion.



When the market cap of UST grows, the supply of LUNA shrinks, which puts upward pressure on LUNA’s price. But the reverse is also true — when the UST supply contracts and the price drops below a dollar, LUNA is minted and sold to restore equilibrium.



Trouble began for UST after an <a href="https://terrasco.pe/mainnet/address/terra1yl8l5dzz4jhnzzh6jxq6pdezd2z4qgmgrdt82k" target="_blank" rel="noreferrer noopener">$85 million transfer</a>, coming from the Terra blockchain through the <a href="https://www.portalbridge.com/#/transfer" target="_blank" rel="noreferrer noopener">Wormhole bridge</a> to Ethereum, was <a href="https://twitter.com/CurveSwaps/status/1523059517486891008?s=20&amp;t=OvV3UWv23aNN6GAI03d0vg" target="_blank" rel="noreferrer noopener">quickly sold on Curve</a> on May 7. Another $108 million in UST from the same Terra address was sent to the Binance exchange and sold.&nbsp;



Although the market arbitrage mechanisms built into the protocol are working as intended, such large transactions pushed the price on those exchanges markedly off peg.



&#8220;As bid-side liquidity for UST on third-party market venues thins out, peg dislocations can occur until the open arbitrage loop is closed, which can take some time for inflows of bid-side liquidity to increase,&#8221; a Teraform Labs (TFL) representative told Blockworks. &#8220;This can depend on several factors, including expected profits from the open arbitrage trade, liquidity constraints, long-term demand for LUNA staking cash flow from Terra network activity, and other factors.&#8221;



The loss of peg led major accounts to begin <a href="https://twitter.com/pedroexplore1/status/1523232362565627906?s=20&amp;t=eQdUFOsOBjtfFPYKcmx1aA" target="_blank" rel="noreferrer noopener">withdrawing UST</a> from lending- and borrowing-dApp <a href="https://app.anchorprotocol.com/" target="_blank" rel="noreferrer noopener">Anchor Protocol</a> by the millions.



Anchor offers a subsidized yield, that for most of its history was 20% APR, but was recently lowered to 18%. The vast majority of UST is deposited there. Since the UST peg started to wobble, Anchor’s deposits have fallen by almost a quarter: Around $3.5 billion has been withdrawn.



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/AoyqBvy2PV2iu5Y3e7jMfbeX0hNr6704ph3tjWBPWnti7Df_OnDdloBqjCVA2CV7MPwoDpANmS9ekovmVAenskjso0Nh276mpNqS9JOWqEzCELyqg4CFROX1SOFvUEeQbVdGfYsv4WD4LA_EyA" alt=""/><figcaption>Source: <a href="http://app.anchorprotocol.com/">Anchor Protocol dashboard</a> as of 11:10 am ET</figcaption></figure>



After a couple of tense hours, TFL’s Do Kwon <a href="https://twitter.com/stablekwon/status/1523177914077917184" target="_blank" rel="noreferrer noopener">took to Twitter</a> in a bid to calm markets.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I’m up &#8211; amusing morning Anon, you could listen to CT influensooors about UST depegging for the 69th time Or you could remember they’re all now poor, and go for a run instead Wyd&mdash; Do Kwon 🌕 (@stablekwon) <a href="https://twitter.com/stablekwon/status/1523075465384136704?ref_src=twsrc%5Etfw">May 7, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In a follow-up, he waxed philosophical, expressing confidence in the stablecoin’s, well, stability.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Those of you waiting for the earth to become unstable — I&#8217;m afraid you will be waiting until the age of men expires, cities have returned to the dust, oceans have gone bone dry, the map of continents have been drawn anew, and dinosaurs once again roam the earth.”</blockquote>



A large market operator began selling ether en masse to rebalance the UST Curve pool and support the price.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">This address is swapping 1,000 ETH to USDT to UST every few minutes. ~30,000 swapped. Plus a 20,000 ETH transfer to Binance.<a href="https://t.co/BCcJiuKiHH">https://t.co/BCcJiuKiHH</a>&mdash; mhonkasalo (@mhonkasalo) <a href="https://twitter.com/mhonkasalo/status/1523137936119582721?ref_src=twsrc%5Etfw">May 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



It’s unclear who caused the initial mass selling of UST, or who stepped in to support the price — the LFG declined to comment on speculation as to the owner or owners of the active wallets. Critics have long argued that the available liquidity on exchanges is insufficient to support large-scale efforts to exchange UST for alternative stablecoins or fiat currency.



Do Kwon <a href="https://twitter.com/FreddieRaynolds/status/1523148819361595392?s=20&amp;t=IVwIzt33wnKqiRD8oCToIQ" target="_blank" rel="noreferrer noopener">initially blamed</a> a single bad actor in a since-deleted tweet that misrepresented the percentage of users responsible for Anchor withdrawals.



Caetano Manfrini, an attorney for Brazil-based GEMMA Ecosystem, told Blockworks he believed the sequence of events were well timed.



“I don&#8217;t know if all these steps were orchestrated, but it seems to me that someone was waiting for a window of opportunity (BTC crash), in the middle of Saturday night…Opportunists [have been] common in the market since our existence,” Manfrini said. “If it happened once, it will happen again.”



<h3 class="wp-block-heading">Luna Foundation Guard deploys reserves</h3>



In an attempt to restore confidence, the LFG announced Monday it would loan $750 million in bitcoin and an equal amount of UST to a professional market maker to facilitate the arbitrage operations needed to maintain the dollar peg.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">3/ Per the LFG’s mandate, the LFG will proactively defend the stability of the <a href="https://twitter.com/search?q=%24UST&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$UST</a> peg &amp; broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.&mdash; LFG | Luna Foundation Guard (@LFG_org) <a href="https://twitter.com/LFG_org/status/1523512199859171329?ref_src=twsrc%5Etfw">May 9, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



As of noon ET Monday, that bitcoin had yet to be deployed, <a href="https://datastudio.google.com/u/0/reporting/b31cc9e5-c54c-4418-a6ce-b332c57e82e9/page/4YBqC?s=or-T7NeGLew" target="_blank" rel="noreferrer noopener">according to the LFG Reserves dashboard</a>. Eventually, the reserves are expected to backstop the peg through an automatic redemption feature.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;The BTC Reserve Pool <a href="https://agora.terra.money/t/bitcoin-reserve-pool/5259" target="_blank" rel="noreferrer noopener">proposed by Jump</a> would (once deployed on-chain) kick in at a trigger price of roughly 200 BPs below the $1 peg mark as a price floor for the UST peg with billions in BTC liquidity to support UST in such an instance,&#8221; the TFL representative told Blockworks.&nbsp;</blockquote>



Meanwhile, the price of one UST has been trading dangerously low again, dipping to below 70 cents on major exchanges as of 8:15 pm ET, as UST continues to flow out of Anchor Protocol at a rapid rate.



This is a developing story.



This story was updated on May 9, 2022, at 2:27 pm ET, with comments from TFL.



This story was updated on May 10, 2022, at 6:00 am ET.



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Luna Foundation Guard To Support Struggling UST Peg With BTC Reserves

Jacquelyn Melinek

<div id="highlights-block_621548b0ac951" class="highlights">
 <ul>
 <li>This is one of the largest capital raises to date in the crypto industry, next to NYDIG’s $1 billion funding round in December 2021</li>
 <li>“[It’s] $1B to absorb liquidity crunches,” Kanav Kariya, president of Jump Crypto, tweeted</li>
 </ul>
 
</div>



A nonprofit working to scale the ecosystem of the Terra blockchain has raised $1 billion in a private token sale.



With the funding, the Luna Foundation Guard (LFG) plans to establish a bitcoin reserve for Terra’s UST stablecoin.



“The UST Forex Reserve is an initiative to provide a further layer of support using assets that are considered less correlated to the Terra ecosystem, initially with Bitcoin but with plans to expand to other major non-correlated assets within the market moving forward,” the foundation said in a statement.



Jump Crypto and Three Arrows Capital led the token sale, with participation from DeFiance Capital, GSR, Republic Capital, Tribe Capital and others.



The raise is one of the largest to date in crypto, next to <a href="https://cms.blockworks.co/nydig-closes-1b-funding-round-raising-valuation-above-7b/" target="_blank" rel="noreferrer noopener">NYDIG’s $1 billion</a> funding round, which raised its valuation above $7 billion in December.



Terra, a fast-growing blockchain, now supports more than <a href="https://www.terra.money/ecosystem" target="_blank" rel="noreferrer noopener">70 projects</a>.



As an algorithmic stablecoin, UST is pegged to a series of financial aspects within the Terra protocol, which leads to moves above or below $1. LUNA — Terra’s reserve, staking and governance asset — retains an elastic supply to help neutralize market pressures.



“[It’s] $1B to absorb liquidity crunches,” Kanav Kariya, president of Jump Crypto, <a href="https://twitter.com/KariyaKanav/status/1496194701048877059?s=20&amp;t=XGC5LUVfS5bwwoApwPFiIQ" target="_blank" rel="noreferrer noopener">tweeted</a>. “All contractions in the economy have caused reflexive movement (by design). Allowing for a big chunk of withdrawals in [a] short span through different means can be really impactful.”



The token sale will capitalize initially on its UST Forex Reserve, with investor purchases locked up over a four-year vesting period.



Additional details on the reserve’s function will be released in coming weeks, the foundation said. LFG was not available for additional comment.



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Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



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