Terra peg questioned as UST drops to $0.67

Terra USD (UST), the third-largest stablecoin by market capitalization, appears to be in a disastrous situation as it has de-pegged from the U.S. dollar, falling as low as $0.67 on May 10.

As its price fell, its market cap fell along with that of Terra (LUNA), which backed most of UST's value. To make matters worse, the market value of UST far exceeds that of LUNA, which has aroused great concern from the cryptocurrency community.

As of this writing, UST is priced at $0.78 with a market cap of $14.1 billion, while LUNA has been in freefall, plummeting to $35.07. This led to a massive liquidation of leveraged positions, bringing its market cap down to $12.3 billion, according to CoinGecko.

If the market cap of LUNA is lower than UST, then the Terra project may not have sufficient funds to support the value of the algorithmic stablecoin and maintain its peg.

The Luna Foundation Guard (LFG), tasked with ensuring UST remains pegged to the U.S. dollar, has been doing damage control, trying to mitigate any further losses and restore the stablecoin to $1.

Its strategy of acquiring Bitcoin (BTC) to collateralize UST has yet to have a positive impact. Cointelegraph reported that since May 7, a whale began dumping $285 million worth of UST, causing the stablecoin to drop to $0.98 and LUNA to a three-month low of $61.

With the LUNA price and the UST peg itself looking volatile, LFG deployed $1.5 billion worth of Bitcoin on May 9 as a means of adding much-needed liquidity to the ecosystem. LFG loaned BTC to trading firms “to secure the UST peg” and loaned 750 million UST tokens to accumulate bitcoin.

LFG held approximately 167,081 bitcoins, worth approximately $3.5 billion, as of May 5, when it announced it had purchased an additional 37,863 bitcoins.

Six hours before this article was written, Terra founder Do Kwon appeared unimpressed by the market impact, tweeting: "More capital deployed." Shortly after, Cointelegraph reported on Tuesday that LFG moved 42,500 bitcoins to Multiple destinations, including the OKX crypto exchange. Since then, Kwon has not spoken out.

However, the idea that bitcoin could be a viable backing for a dollar-pegged stablecoin is being tested to its limits. From May 5 to today, the price of bitcoin fell from $39,874 to $30,269, a roughly 25% drop, according to data from CoinGecko.

LFG’s constant tinkering with UST has drawn the ire of decentralization proponents, such as Flashbots.net Hasu’s head of strategy tweeted Tuesday, “I don’t want people calling UST decentralized anymore.”

At the time of writing, the price of UST is down 22% from $1.

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