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Dollar stablecoin UST plunged substantially on Wednesday to below 40 cents, as its sister token Luna also sank 80% to $5.
UST, a stablecoin pegged to the value of the dollar, plummeted more than 60% to 35 cents on Wednesday. UST’s sister token Luna (LUNA) also crashed by more than 80% to $5 amid a general decline in cryptocurrencies. For instance, leading digital currency Bitcoin (BTC) dropped 5% to $30,321, while closest rival Ethereum (ETH) dipped 4% to $2,286.
On Tuesday, BTC briefly dipped below the $30K level, marking the coin’s lowest point since July 2021. Since its record high of approximately $69K in November last year, BTC has now sunk by more than 56%.
The recent collapse of UST and Luna means that the two tokens from the beleaguered crypto project Terra are substantially down. According to David Moreno Darocas, a research analyst at CryptoCompare, the UST and Luna situation underscores the fragility of algorithmic stablecoins. Such fragility is more apparent since “UST has grown to be both an integral and controversial piece of the crypto ecosystem.”
Although still in its formative years, UST has emerged as a prominent player in the crypto ecosystem. It is the world’s third-largest stablecoin and deploys an intricate system of minting and burning tokens for supply adjustments and price stability. At the moment, the dollar-pegged stablecoin has a massive circulatory supply of approximately 17 billion tokens. The sell-off pressure precipitated the latest UST price crash in the crypto marketplace which triggered further panic.
UST Bitcoin Backing
UST creator Do Kwon currently has a massive $3.5 billion Bitcoin haul through his Luna Foundation Guard. This fund essentially supports the controversial dollar stablecoin in times of crisis. However, the bigger concern now is that should Luna Foundation Guard plow these Bitcoins into the market, there might be an even bigger sell-off.
As a result, UST may take on more importance to BTC investors, who have been paying close attention to the stablecoin like other investors. According to Bitwise Asset Management chief investment officer Matt Hougan, “every professional investor in crypto has one eye on UST today, watching to see if it can maintain its peg to the dollar. There’s clearly significant risk in the market.”
On Tuesday, Kwon announced that he was “close to announcing a recovery plan” for UST via a tweet.
UST as a Dollar-Pegged Stablecoin
Stablecoins function similarly to bank accounts – but for the crypto ecosystem. In theory, they provide a great store of value to negate crypto volatility. UST was created by Singapore-based Terraform Labs back in 2018 as part of the Terra blockchain project. As a stablecoin, UST exists alongside other dollar-tracking stablecoins such as Tether and USDC. However, unlike those other digital currencies, Terra does not possess cash or other assets held in reserve to back its token. Instead, it uses a complex mix of codes, alongside sister token Luna, for price stability.