The point of projects like UST is to enable crypto traders to make transactions easily and quickly without needing to leave the digital asset ecosystem,rely on intermediaries or worry about the value of their coins going up and down. By using software programs to manage the token’s volatility,the opportunities for profiting off arbitrage are even greater — DeFi lender Anchor Protocol was known for offering market-beating rates of up to 20 per cent to traders willing to deposit UST on its platform. In summary,it’s the crypto dream.
A month ago,the future looked bright for Terra and its main backer Do Kwon:A consortium called the Luna Foundation Guard aimed at providing collateral for Luna — then at an all-time high value of $US119 — had bought more than $US1.5 billion in Bitcoin to shore up UST’s peg,with its members reading like a Who’s Who of crypto. But on Monday,all of the mechanisms that were supposed to keep UST stable weren’t. It fell to a low of 60 cents on that day,and reached a further low of around 20 cents in another crash on Wednesday,taking its market value down from $US18.4 billion to $US5 billion. Luna also fell considerably,dropping to as low as $US2.35.
“Many people were caught off guard,” said Nikita Fadeev,partner and head of crypto fund Fasanara Digital,which de-risked its position in advance of the crash. “Everything broke there. It is full capitulation.”
Exactly why all of Terra’s carefully-planned mechanisms failed to do their job remains unclear,and conspiracy theories abound about shadowy actors with untold wealth to play with. But one thing’s for certain:Kwon isn’t going down without a fight.
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He’s now attempting to raise $US1.5 billion from new and old investors alike to provide more collateral to UST,hoping to rebuild the token’s liquidity after it virtually disappeared from order books overnight. Some suspect that $US1.5 billion won’t even be enough,and it could take days,if not weeks,for UST to re-peg to the dollar.
“Once liquidity evaporated,this perpetuated the collapse of the stablecoin,” said Clara Medalie,research director at Kaiko,in an email. In order for UST to re-peg,she said,buy orders from crypto traders will need to consume all of the asking price’s liquidity to get it up to $US1. “This morning,there is virtually nothing left.”