By Arjun Kharpal, CNBC
TerraUSD, or UST, has been dragged into the spotlight in the last few days after the so-called stablecoin, which is supposed to be pegged one-to-one with the U.S. dollar, fell sharply below the US$1 mark.
UST is an algorithmic stablecoin which uses code to maintain its price at around $1 based on a complex system of minting and burning. A UST token is created by destroying some of the related cryptocurrency luna to maintain the dollar peg.
Unlike rival stablecoins Tether and USD Coin, UST is not backed by any real-world assets such as bonds. Instead, the Luna Foundation Guard, a nonprofit created by Terra’s founder Do Kwon, is holding about US$3.5 billion of bitcoin in reserve.
But in times of market volatility, such as this week, UST is being tested.
Its peg has been lost and now investors are rushing to dump the associated luna token. Luna’s price has plunged from around $85 a week ago to trade at around 4 cents on Thursday, according to data from Coin Metrics, making the cryptocurrency almost worthless.
On Thursday, Binance, one of the world’s largest cryptocurrency exchanges, said that the Terra network, the blockchain associated with the luna token, is “experiencing slowness and congestion.” Binance said that as a result, there is a “high volume of pending Terra network withdrawal transactions” on its exchange, in a sign that investors are rushing to sell luna.
Binance had to suspend withdrawals of luna for a few hours on Thursday because of the congestion, before resuming them.
The TerraUSD controversy has sparked contagion in the broader cryptocurrency market. That’s because the Luna Foundation Guard is holding bitcoin as a sort of reserve. The fear is now that the organization my have to sell off its bitcoin holdings to try to support the peg.
Bitcoin has plunged more than 29% in the last seven days and on Thursday dropped below US$26,000 at one point to trade at its lowest level since late Dec. 2020.
Tether, the world’s largest stablecoin, also fell below its US$1 peg on Thursday amid a broader panic in cryptocurrency markets.