Stablecoins are meant to have stable value as suggested by the term. These digital assets are pegged to fiat currencies like the US dollar, precious metals, or other cryptocurrencies. In the case of Terra’s stablecoin UST (TerraUSD), an algorithmic stablecoin, it is partnered with its sister cryptocurrency LUNA (Terra). When a UST token is bought, an equivalent value of LUNA is burned, thereby removing it from circulation and thus maintaining the peg.
With the surge in the value of LUNA (Terra), the native token of the Terra network, the UST (TerraUSD) moved to the #3 spot surpassing BUSD (Binance USD) in terms of market cap. LUNA token has even momentarily surpassed Ether as the second most staked crypto. Everything was smooth sailing for the LUNA altcoin and its stablecoin, UST.
Despite rumors that Terra was actually a Ponzi scheme, the cryptocurrency attracted many investors that have contributed to the seemingly unstoppable rise in its value. In April, LUNA (Terra) recorded its newest all-time high with its price of $119.18. The geopolitical tension between Russia and Ukraine has created uncertainty and fear among investors resulting in massive sell-offs of riskier assets like cryptocurrencies. And a market crash became inevitable sending the price of BTC (Bitcoin) into a free fall. As expected, prices of cryptocurrencies plummeted to more than 50%. But what’s more surprising, LUNA (Terra) and UST (TerraUSD) crumbled sending a shockwave to the whole crypto industry. Cryptocurrencies are known to be volatile but stablecoins should always maintain their value amid the market’s turmoil. But what was the reason behind the stablecoin’s declined value?
The Story Behind the Depeg Stablecoin
One of the reasons digital assets were always considered risky investments is their vulnerability to price manipulation. But cryptocurrencies, in general, are volatile, so like it or it’s hard to tell if the decline in their value is a result of price manipulation. But it’s definitely a different story if a stablecoin is involved. With Terra’s UST, a conspiracy theory has surfaced. Who were the parties involved? Fingers are now pointed at BlackRock, Citadel Securities, and Gemini as the entities behind the alleged conspiracy. It can be recalled that Citadel was a party to the GameStop short squeeze so some may find this story plausible. The parties were swift to deny the allegation but the story has now become a subject of discussion in crypto communities. But what was the story all about?
A story posted on Reddit which claims to be the truth behind LUNA (Terra) and UST (TerraUSD) price crash stated that BlackRock and Citadel borrowed 100,000 BTC from Gemini Exchange from which 25,000 were swapped to the stablecoin UST. Then two companies dumped the stablecoin and the BTC (bitcoin) causing the prices of the two cryptocurrencies to crash. This was also confirmed by Cardano founder Charles Hoskinson in a now-deleted tweet that has received mixed responses from users.
DigitalX CEO Lisa Wade in her statement with ABC’s The Business commented on the matter.
“Conspiracy theorists would say ‘yes’, because it’s a massive trade. I mean, in all of my career, it’s one of the biggest trades that I’ve seen. It’s almost like an evil genius plot, because there are a lot of steps to it.”
According to Wade, it was a well-orchestrated attack. She added:
“So obviously we’re in a really volatile risk-off stage of the market — because of everything that’s been happening with the [US] Fed and the macro environment. They waited until a Saturday night when [trading] volumes were very low, and there were no bids. And then they went into a trading pool and started selling UST in massive volumes, which then triggered all of the subsequent selling in a low-volume market that broke the [US dollar] peg.”
She further added that as the death spiral kicked in, the algorithm started selling Bitcoin and other cryptocurrencies that have further aggravated the situation. The massive sell-off took a toll on all digital assets including LUNA (Terra). The attack came like a thief in the night. As the UST (TerraUSD) price continued to decline, the price of LUNA (Terra) also went in a nosedive.
“This was an exploitative trade that took advantage of the fact that markets are weaker. The perfect storm was nobody stepping up to buy the bitcoin and the UST”.
According to a report by Cointelegraph, the attack on the Terra network could be a George Soros-inspired “attack” where the exploiters generated over a whopping $800 million. But hedge fund giant, the world’s largest asset manager, and the trading platform have all denied their involvement in the controversial Terra crash. Blackrock in a tweet on its official Twitter account stated:
“Rumors that we had a role in the collapse of UST are categorically false. In fact, Blackrock does not trade UST.”
Gemini also dismissed the rumors of its involvement in its recent tweet.
“We are aware of a recent story that suggested Gemini made a 100K BTC loan to large institutional counter-parties that reportedly resulted in a selloff in LUNA. Gemini made no such loan.”
In a report by Bloomberg, Citadel through a representative asserted that the company “does not trade stablecoins, including UST”.
With all the ruckus going on within the Terra network, will UST stablecoin be able to recover from the fall? With the price of the LUNA (Terra) on a free fall, seems like this is no longer doable. In a recent update from Terra co-creator Do Kwon, the network’s plan to save its cryptocurrency LUNA does not include UST stablecoin. He stated:
“While a decentralized economy does need decentralized money, UST has lost too much trust with its users to play the role.”
If this is the case, what will happen to all the holders of UST? As of writing, the stablecoin depegged has almost no value after declining by more than 90% with its price at 0.079647. The altcoin LUNA (Terra) is now down to almost 100% at its price of $ 0.000295. UST (TerraUSD) was previously ranked #3 among stablecoins but after losing its peg to the dollar, it’s now just the stablecoin that never was. But how will this fiasco affect the entire crypto market?
In December 2020, STABLE Act was proposed by US lawmakers to regulate the issuance of stablecoin. If passed into law, stablecoin issuers are required to give the Federal Reserve their bank charters and reserve funds equivalent to their stablecoin amount. They also need to secure FDIC insurance and will have to undergo an audit by the Federal Reserve to ensure compliance. But it was met with high criticism from the blockchain and crypto community deterring it from passing into law. Will the UST fiasco create another debate on the need to regulate stablecoins? Regulation is rearing its head and the possibility of pushing through this time could be inevitable.