Crypto Crash: UST loses its dollar peg and drags LUNA to a sharp 65% drop

For its part, the Luna token hit a low of $16.49. At the moment it accumulates a loss of 80.8% in just seven days and in the last 24 hours it has lost 61.6% of its value. Luna also ceased to belong to the top 20 of the cryptocurrencies with the highest market capitalization.

Luna Foundation Guard (LFG), the entity behind the Terra dollar and the Terra token, took action that led to further uncertainty. LFG bought Bitcoins to raise its crypto reserve to $3 billion, advancing its goal of generating a $10 billion bitcoin coin pantry, but ultimately failed to stabilize the cryptocurrency. currency.

About $1.4 billion worth of Bitcoin (BTC) was reportedly moved from the wallet linked to the Luna Foundation Guard (LFG) on Monday, raising questions about its ultimate fate on a day when the price of Bitcoin fell more than 11%.

How UST works

UST is a decentralized algorithmic stablecoin, which means that it does not have traditional assets like the backing dollar like Tether’s USDT does. Their linkage is governed by smart contracts in a burning mechanism between LUNA and UST.

Each time this exchange is made, the UST traded by LUNA is destroyed and withdrawn from circulation. This creates an arbitrage opportunity for speculators. This is because every time UST falls below its dollar parity, there is an opportunity to buy that stablecoin at a discount and then trade (and destroy) it for $1 in LUNA. These two market forces work to bring the peg back to parity with the dollar.

What happened is that the stablecoin lost its parity quickly, people tended to exchange their UST for LUNA at a dollar and pocket the profits by selling LUNA on the open market. This has created enormous selling pressure for LUNA in the market.

Selling pressure, the panic around the dollar peg by UST, and the halting of the UST and LUNA markets by Binance, were the key factors behind this LUNA downtrend.

These types of designs have been criticized by market observers as risky, as they rely on traders to return value to $1, rather than having assets continually support the price.

Binance’s decision

The largest cryptocurrency exchange in the world, Binance, announced the temporary suspension of withdrawals from Terra (LUNA) and TerraUSD (UST). The decision is part of the high volatility experienced in recent days and that has caused a strong network congestion.

Through an announcement published in the early hours of Tuesday, May 10, Binance announced the suspension of withdrawals of Terra network tokens: LUNA and the UST stablecoin.

The largest cryptocurrency exchange in the world highlights that the measure is due to the slowness and congestion of the network. The measure came into effect at 02:20 am (UTC) today.

Finally, Binance notes that withdrawals will be allowed again “once we consider the network to be stable and the volume of pending withdrawals has been reduced.”

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